Inflation tamed, focus now shifts to growth: Subbarao
Reserve Bank of India governor hints at stronger impact of global credit crisis.
Reserve Bank of India (RBI) Governor D Subbarao said various anti-inflationary measures had started yielding results and now the government could focus on issues related to growth and liquidity.
“The endeavour of our monetary stance has been to manage liquidity, both domestic and forex, and to ensure that credit continues to flow for productive activities,” he told the media here On Thursday. The governor was in the city to address a conference organised by the Bank for International Settlements (BIS).
Inflation declined for the fourth straight week On Thursday to 8.4 per cent from 8.84 per cent on November 22 as a result of cheaper food and fuel prices and a slowdown in domestic demand.
Subbarao said the impact of global financial crisis was much stronger and longer contrary to the belief that India was insulated from it. India will be the first and the fastest country to recover, but a painful adjustment is inevitable, he added, hinting that RBI would maintain a comfortable liquidity position.
On why banks were not cutting interest rates despite RBI infusing liquidity into the system, he said RBI as a regulator would only signal banks to cut rates through various measures, but would not give a mandate to them.
Earlier at the conference, the second BIS seminar to be organised by RBI, he said the global financial situation continued to be uncertain and unsettled. “The global economic outlook has deteriorated sharply over the last two months.”
“The Indian banking system is not directly exposed to subprime mortgage assets and has limited indirect exposure to the US mortgage market or to the failed institutions or stressed assets. Indian banks, both in the public and private sectors, are financially sound, well-capitalised and well-regulated. Even so, India is experiencing the knock-on effects of the global crisis,” Subbarao said.
The present crisis should be used to draw lessons to manage global imbalances, reform financial-sector regulations, address regulatory arbitrage and keep the financial sector in line with the real sector, he pointed out.
The fundamentals of the economy continue to be strong, Subbarao said, adding, once calm and confidence are restored globally, economic activity in India will recover sharply.
When asked what steps the RBI and government were proposing to announce on Saturday, Subbarao said, “We are monitoring the situation closely and continuously, and will take the appropriate action at appropriate time. I cannot at this point of time tell you what we will do and when”.
RBI and the government, according to official sources, are likely on Saturday to announce a stimulus package that would include cut in policy rates and taxes to ease liquidity situation and promote economic growth.