Controlling inflation is priority, says Chakrabarty

Agrees lower interest rates needed to attract more investments

The Reserve Bank of India (RBI) has reiterated that controlling inflation is its top priority, dampening the hope of a rate cut in its mid-quarter policy review scheduled on Monday.

“We agree that if the interest rate is low, there will be more investments...but for that, inflation has to come down, and that’s why we say inflation is our top priority,” said Deputy Governor K C Chakrabarty while addressing a college seminar on Friday.

Wholesale price index-based inflation rose to 7.55 per cent in August after falling below seven per cent in July, showed data released on Friday by the government. The central bank has been putting pressure on the government to adhere to fiscal consolidation. The diesel price rise announced last evening is seen as a move towards this.

“If the interest rate is high, (the) saver is benefitted. Whatever is the rate of inflation, (the) saver must be given a higher return than what the inflation is, so that he will save,” he said. He added the US Federal Reserve’s announcement last night on quantitative easing could push up commodity prices. Yesterday, Fed chairman Ben Bernanke kept the key rate unchanged and announced buying of $40 billion of mortgage-backed securities per month.

Rising commodity prices will push up prices, making it difficult for the central bank to cut rates. In the first quarterly monetary review announced on July 31, RBI had raised its inflation outlook to seven per cent and revised the year’s growth target to 6.5 per cent. After reducing the repo rate (at which it lends to banks) by 50 basis points in April, it maintained status quo in the next two policy reviews.

The consensus among market participants is that Monday’s review would leave the rate unchanged.

Yesterday, the government had taken a long-pending decision to raise the price of diesel, by Rs 5 a litre. This should reduce its subsidy burden by Rs 20,000 crore. It had also decided to cap the number of subsidised cooking gas cylinders to six per family in a year.

On heavy restructuring happening in the banks’ books for the past couple of years, Chakrabarty said, “Restructuring is not bad per se but it should be done ethically and not misused.” He also said the country needs real sector reforms first, adding that the financial sector reforms couldn’t happen in isolation.