Govt says RBI move on expected lines

C Rangarajan says high inflation left RBI with no option but to go for repo rate hike, differs with central bank on its inflation expectations

The government on Tuesday said the Reserve Bank of India (RBI)’s monetary policy action was on expected lines. Though there was no formal statement from Finance Minister P Chidambaram on the issue, officials said the central bank and the ministry were on the same page, as priorities had changed following the US Federal Reserve’s announcement in May that it would start tapering its stimulus programme.

C Rangarajan, chairman of the Prime Minister’s Economic Advisory Council, said as the repo rate increase was expected, the markets weren’t surprised. He added high inflation had left RBI with no option but to go for a repo rate rise.

He, however, differed with the central bank on inflation expectations. “I think the inflation rate might not be as high as the (RBI) report seems to suggest. I think as far as WPI (Wholesale Price Index) is concerned, it (inflation) would be 5.5-six per cent. I don’t think it would exceed six per cent...I expect WPI, as well as CPI (Consumer Price Index), to remain at a slightly lower level than indicated,” Rangarajan said. RBI said this financial year, retail inflation would be about nine per cent, adding wholesale inflation would be higher than the current level.

In its second quarter policy review on Tuesday, the central bank reduced the MSF by 25 basis points—from nine per cent to 8.75 per cent. The repo rate was increased from 7.5 per cent to 7.75 per cent.

In the past, the finance ministry had openly expressed its displeasure at repo rate increases or the status quo by then RBI governor D Subbarao. Officials said now, the persistently high inflation had led to the belief containing it was important. In September, WPI-based inflation stood at a seven-month high of 6.46 per cent, while CPI-based inflation stood at 9.84 per cent, a three-month high. For the quarter ended June, growth in gross domestic product stood at a four-year low of 4.4 per cent.

Rangarajan said to contain inflation, both demand and supply factors had to be addressed. “There could be moderation in food inflation. But for other items, there has to be speedy completion of projects and bottlenecks need to be removed,” he said. Monetary and fiscal policies should go hand in hand and these measures could help reduce inflation in the coming months, he added.

On RBI’s growth 2013-14 projection of five per cent, he said if this was the overall growth rate, it would mean a substantial rise in growth in the second half of the year. “Growth could be slightly above five per cent due to revival of economic activity in the second half. I do not think there is a question of altering our (PMEAC’s) growth projection,” he added.

In its Economic Outlook report for 2013-14, PMEAC had projected gross domestic product to grow 5.3 per cent this financial year, against its previous forecast of 6.4 per cent.