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Monday, July 9, 2012

High Inflation and Low Growth is a problem for RBI

The Reserve Bank of India (RBI) will find it difficult to cut interest rates in its monetary policy review later in the month in the absence of softening of inflation, the Prime Minister’s Economic Advisory Council (PMEAC) Chairman, C. Rangarajan, said today.
“I believe if the inflation rate, particularly non-food manufacturing, shows decline then there will be scope for RBI to adopt easier stance,” he said on the sidelines an event organised by the National Housing Bank in New Delhi.
“Situation in India is somewhat different from situation in other countries. In other countries, growth rate is low but at the same time inflation is also low, whereas in our country while growth is slowing inflation remains at the high level,” he said.

The RBI is scheduled to announce its quarterly review of monetary policy on July 31.
While the RBI left its key policy rates unchanged in its last policy review in June, European Central Bank (ECB) and People’s Bank of China (PBoC) slashed their respective policy rate earlier this month to boost growth.
The ECB reduced its main interest rate to a record low of 0.75 per cent and its deposit rate to zero to help tackle the eurozone crisis.
Unveiling the mid-quarter monetary policy review on June 18, the RBI had said, “reduction in the policy interest rate at this juncture, rather than supporting growth, could exacerbate inflationary pressure”.
The wholesale inflation was 7.55 per cent in May. At the retail level, the Consumer Price Index (CPI) inflation for the same month was 10.36 per cent.
Asked if the government could come out with a stimulus package to revive economic growth, Mr Rangarajan said the scope for stimulus is limited as fiscal deficit is high.
“We have to make an effort to contain fiscal deficit at the budgeted level. That itself is a very big task. Therefore, we need to look at government expenditure,” he said.
“We must reallocate expenditure in such a way that there is emphasis on capacity creation, there is emphasis on capital formation. Therefore, the direct answer is that the kind of stimulus that we provided in 2008, scope for that is not available,” he added.
The government had provided stimulus package worth 1.86 lakh crore in 2008-09 to spur growth in the wake of economic slowdown. 

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