With the Union Budget just a few days away and January's inflation standing at 6.6 percent, RBI Governor, D Subbarao says that while there is a room for monetary easing over the next few months, it will, however, be limited.
Despite January inflation coming in at 6.6 percent , RBI Governor, D Subbarao, signaled inflation risks will limit the extent he can reduce interest rates to bolster an economy that is moving at the weakest pace in a decade.
Subbarao opines the central bank's focus will be on not just the fiscal deficit number but the quality of fiscal adjustment too. "Important variable for monetary policy calibration is the fiscal adjustment that the government will do. The Government will come up with deficit statistics in the Budget. We will look at the headline fiscal deficit number but also look at the quality of the fiscal adjustment," he adds.
Subbarao says the RBI's monetary policy stance will be determined by a number of factors including how inflation will unfold.
Below is the edited transcript of Subbarao’s views on where inflation is headed and how it could pan out.
On the growth inflation outlook, as we said in our January policy statement, indeed 7.2 percent inflation is for Dec. Subsequently, earlier this week, we've had inflation numbers for the month of January which is 6.6 percent. It is a tad lower than our projection for March 2013 where we predicted about 6.8 percent.
So, our monetary policy stance is going to be determined by a number of factors, including how inflation will unfold. There are number of risk factors for inflation. By far the most important is the current account deficit, because this year we expect the current account deficit as a proportion to GDP to be historically the highest, as we'll need to take that into account for our monetary policy calibration.
There is pressure on the government to consolidate fiscally. There is pressure on the central bank to bring about an environment of price stability, and for the government to understand that we need fiscal consolidation, price stability for long-term growth. There is ofcourse a difference of view in the short-term. A different perception depending on where one is sitting but I don't think one should see that as a major division.
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