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Aug 01, 2012, 09.31 AM IST
The central bank today did the expected leaving key policy rates unchanged. The RBI left the repo rate at the existing 8% and cash reserve ratio (CRR) at 4.75% but threw in a surprise, cutting the statutory liquidity ratio from 24% to 23% effective August 11.
Even though the Reserve Bank of India's policy action has tried hard to tame the burgeoning inflation, it has only raised its head time again posing a threat to the economy. Expressing concerns, Deputy Governor of the RBI, Subir Gokarn warns that the inflation risks have intensified in the past three months while poor monsoon, falling rupee, unstable oil prices only added to troubles.
In an exclusive interview to CNBC-TV18's Latha Venkatesh, Gokarn said that RBI's stance on low growth will weigh in inflation. He added that latent risks regarding growth and inflation have materialised.
"It was in April for the first time we decided that growth risk outweigh the inflation risk, which motivated an action. From that point on as we have evaluated the situation growth risks have remained, they have not gone away, but in these three months inflation risks have clearly intensified," he explained.
In its monetray policy review today, the central bank left key policy rates unchanged but threw in a surprise, cutting the statutory liquidity ratio from 24% to 23% effective August 11. The central bank also painted a gloomy picture on growth revising FY13 GDP lower to 6.5% from 7.3%.
The RBI also maintained that the main focus of the policy would be inflation and in that regard, upped the inflation forecast from the current 6.5% to 7%.
"RBI action will depend on inflation movement," he added. Gokarn also said that the economy needs measures to boost growth & lower inflation
Here is an edited transcript of the comments.
Q: There is still some confusion about understanding how Reserve Bank is approaching say the next rate action. Will it be difficult for the Reserve Bank to find any elbowroom because you all have upped your inflation forecast? Is it that if the output gap increases significantly like the next GDP reading is a 5 handle or even a 4 handle that would give you an elbowroom to cut?
A: If we look at it from April onwards, it was in April for the first time we decided that growth risk outweigh the inflation risk, which motivated an action. From that point on as we have evaluated the situation growth risks have remained, they have not gone away, but in these three months inflation risks have clearly intensified.
So in April, we assumed normal monsoon, which at that point of course the forecast came a little later, but the buzz was generally that the monsoon would be normal.
The rupee has depreciated somewhat more particularly after May when Europe intensified and oil prices after having moderated particularly upto first week of June have now started to go up. I think the pressure from a global liquidity infusion will only be towards raising them further.
So between April and now the inflation risk have gone up. So when you are looking at a quarter-by-quarter approach obviously the larger trajectory would suggest that we are experiencing slowing growth. So the bias or the inclination must be to address that, but at a time when the inflation risks are starting to magnify a balancing act clearly needs to be done and so that’s really been a motivation for this pause.
Basically, we are saying that the growth risk remain, but between April and now the inflation risk had magnified and that has been reflected in our projections. The fact that we have taken the growth number down from 7.3% to 6.5% suggest that we believe some of those risks have actually materialized.
At the same time, we have taken the inflation number from 6.5% to 7%, which again suggest that some inflation risks that are latent then or just being considered have now materialised. So that has really resulted in this swop if you will switching of the order and the same sets of factors are going to determine how we look at it over the next quarter.
Risk may moderate on some fronts, may intensify on others and we will have to take stalk of them in terms of the balance.
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