Short term sacrifice of growth inevitable for sustained economic growth: Subbarao

Defending the Reserve Bank of India’s (RBI) status quo on key interest rates in its mid-quarter monetary policy review, Governor D Subbarao explained that the central bank chose to keep its focus on reining in the inflationary pressure on the economy rather than stimulating economic momentum since inflation at 7.55% in May was above tolerance levels. In order to lead the economy on a sustainable growth path in the long run, he pointed that some sacrifice in growth was an unavoidable price to pay and liquidity tightening was essential to support growth in the medium-term with low and stable inflation.

Subbarao opined that the rate of price rise in food products was not cyclical but structural as consumption is not likely to increase in the same proportion with the rise in income levels. According to him, reigning in inflationary pressure was the top priority of the RBI as persistent inflation, irrespective of the drivers, runs the risk of unbalancing inflation expectations. Hitting out at the critics he stated that contrary to popular perception, the RBI studies all inflation indicators at disaggregated level to assess the inflation dynamics, highlighting that core inflation is higher than the recent long period average of 4 percent while, consumer price inflation was at 10.4 percent in May 2012 which was high and still on the uptrend.

On June 18, the RBI, often regarded as one of the world's most aggressive central banks, lived up to the tag as they dashed all hopes of slashing key interest rates by leaving them unmoved in its recent mid-quarter monetary policy review meet. The RBI maintained status quo on the repo rate, rate at which banks borrow money from RBI, keeping it unchanged from its 8 percent levels. Consequently, the reverse repo rate, rate at which Reserve Bank borrows money from banks, under the liquidity adjustment facility (LAF) remained unchanged at 7.0 percent.

The central bank’s move defied wider market expectations of a cut in key interest rates by 25 basis points as they expected RBI to employ monetary easing measures to bring the economy out of doldrums. The policy decision had stunned financial markets and even the Commerce and Industry Minister Anand Sharma had vowed to take up the matter with the Finance Minister and the RBI Governor.

The RBI Governor also underscored that apart from global financial woes, deteriorating domestic factors have triggered the sharp depreciation in rupee against the US dollar. The beleaguered Indian currency has fallen 19.3 percent since August 2011 and has been Asia's worst performing currency so far this year. Among the currencies in the BRIC bloc, he said the Brazilian Real had witnessed the largest depreciation followed by the rupee during this period. The growing current account deficit, the relative inelasticity of imports and high inflation had negatively impacted the rupee. In 2011-12, while exports sniffed at $304 billion, imports crossed $486 billion, out of which $155.6 billion were crude and $66.1 billion were gold imports.