RBI to focus on inflation, sees scope for rate cut

The primary focus of monetary policy remains on inflation control. In the current circumstances, lowering policy rates will only aggravate inflationary impulses without necessarily stimulating growth. Interest rate is not the only factor affecting growth, D Subbarao, the governor of Reserve Bank of India told reporters on Tuesday while addressing a press conference on the occasion of first quarter monetary policy.

"In the current environment, growth-inflation is a complex thing to manage. Real rate of interest is still lower than the level in 2008. Besides, other factors are also affecting growth. Our decision to reduce SLR is consistent to long term objective," he said adding that he saw a scope to cut policy rate (in 2012) but was not sure of the timing. Fiscal measures from the government would not necessarily prompt the central bank to take monetary policy action although, some tangible fiscal activities are necessary.

Earlier on Tuesday, the RBI left key policy rates unchanged, citing persistent inflationary pressures. However, it slashed the statutory liquidity (SLR) ratio by 1% to 23%. SLR is the percentage of the net demand and time liabilities that banks need to invest in government bonds.

Meanwhile, the governor dismissed the perception that India is currently going through a phase of stagflation wherein a country’s growth slows down but the rate of inflation keeps rising. "I will call it a stagflation when it persists for a long time," he said in brief reply.

Referring to upward risks to the rate of inflation, the governor observed that the deficit monsoon is significantly more than the growth risk. Other risks, according to him, include wage pressure, structural food inflation (increase in the consumption of protein food) and commodity prices. The regulator raised the baseline projection of WPI based inflation to 7% for March, 2013 as against the earlier projection of 6.50%.