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Inflation at 7.2% is still above RBI’s comfort zone: Subbarao

12 Feb 2013 Evaluate

Dashing hopes of further rate-cut in March policy review, despite inflation falling from peak levels, the Reserve Bank of India (RBI) Governor D Subbarao said the price rise index, which has slowed down to a three-year low of 7.18% in December, is ‘still high’. The statement comes ahead of the January inflation readings to be released later this week.

While addressing an event, Subbarao said 'if you take the macroeconomic context today, you find that growth has moderated, inflation has come off the peak, but even at 7 plus percent, it is still high'. By adding further he said, though it has declined from peak, it is still above the comfort level and pointed out that structural and cyclical factors are driving the inflation.

Moreover, he also said that the RBI is struggling to maintain the balance between the growth and stubborn inflation. Surging fuel and food prices are driving the inflation up, apart from this high fiscal deficit is also contributing to the present price-rise situation. 'Also, the external sector is very vulnerable and that is the macroeconomic context in which we formulate our monetary policy' he added.

The forthcoming inflation numbers are crucial for the RBI since it is coming after the January 29 policy easing, when the RBI cut both the interest rates as well as the cash reserve requirements of banks by 25 bps. Moreover, it also comes after the government partially deregulating the diesel prices in the middle of January by allowing oil companies to raise retail diesel by 40-50 paise every month apart from taking away the subsidy on bulk diesel customers.   

On the criticisms faced by the RBI for not being able to bring inflation down and keeping growth low, the governor said one should understand that the person blaming for growth is very articulate and has got proper platforms for speaking up, however the person pinched by inflation must not go unheard and I think both the RBI and the government should take care of that part of the population. 

Worried over the declining growth, the governor said that the RBI is also concerned over the advance GDP numbers put out by the Central Statistical Organization last week which pegged GDP growth at 5 percent for this fiscal that would be a decadal low. Growth is lower because consumption has fallen, net exports have fallen and most importantly, investment has declined, which is a matter of great concern because today's investment is tomorrow's production capacity, he added.

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