RBI to tame inflation in calibrated manner: Reddy

Reserve Bank of India Governor Y V Reddy met central bank officials to evaluate inflation concerns on Friday, reports CNBC-TV18. He admits that inflation is a problem for both developed and developing countries. "There are legitimate concerns on the inflation front. We will maintain inflation as mentioned in the April Credit Policy statement. RBI is confident of bringing inflation in line with the policy statement. "

According to Reddy, price pressures on account of oil are not entirely unanticipated, but magnified in the Wholesale Price Index on inflation. "Most of the latest hike in inflation is on account of higher oil prices. The hike in inflation is due to oil prices on top of underlying pressures."

He feels the pass through of oil prices is not happening on a continuous basis. "We expect some pressure on prices due to pass through of oil prices. The solutions to the oil problem will be tailored to our conditions. We must build on actions taken so far. RBI's effort is to smoothen and adjust to the new reality of energy prices to contain inflation. The high level of energy prices may not be temporary. We will continue to take determined and calibrated measures with a focus on managing expectations. RBI will play a role, so that pressures on prices are not magnified."

The RBI Governor said the India economy and society is better of adjusting to new reality of high oil prices.

On growth, Reddy said, "The supply-demand situation in India is good. There is no reason to jump to the conclusion that growth will be adversely affected. Whether interest rate will impact on growth will have to be ascertained. We are proceeding under assumption that monsoon will be normal. We are comfortable on food. The financial markets are safe and resilient, and are strong enough to manage the adjustments required." 

According to Krupali Pandit Yadav and Latha Venkatesh of CNBC-TV18, in his first public appearance after inflation crossed over to double digits, RBI Governor YV Reddy was a picture of calm. Exuding confidence in the overall demand-supply situation and the stable markets, Reddy while preparing the market for a rising rate scenario, nevertheless hinted that both the pace and intensity of the rate hikes will be moderate.

After inflation crossed over to double digits last week, stock and bond markets have tumbled and a worried FM and his officials blamed oil and promised monetary action. But Reddy primarily concentrated on soothing the markets’ nerves. This he did by hinting that RBI’s actions will be well considered and calibrated.

He reiterated that he does not see an immediate or pronounced danger to economic growth

On the one hand, YV Reddy has reassured the market that the RBI will not take any hasty decisions or excessive actions. Reddy has also pointed out that growth may not be in danger as yet. Reddy cautioned that the country may have to get used to a long spell of high oil prices and the RBI would help this process, hinting thereby that some rate hikes are in the offing for some time to come. He also gave a veiled direction to banks to hike rates by asking them to participate in demand management.