Managing inflation a tough balancing act, says Subbrao

The Reserve Bank of India (RBI) on Thursday said that inflation was a perennial tension and it would have to do a tough balancing act to set interest rates in a way that inflation was contained and growth rates were not hampered.

The central bank also expressed concerns over the decline in foreign direct investment (FDI) in the country and said it would initiate a study to look into the factors behind the trend.

After its board meet on the third quarter policy review here on Thursday, RBI Governor D Subbarao said, “Prices of food, metals and all import parity prices are the main reasons for inflation. IMF (International Monetary Fund) had estimated that crude oil prices will touch $90 a barrel in 2011. But they have already crossed the $100-mark. In view of the West Asian crisis, we will have to be prepared. Further, non-food credit and demand-side pressures are also a perennial tension. We want to set interest rates in a way that inflation can be contained without hampering the growth rate. But, this is not going be an easy balancing act to resort to. However, RBI has enough talent to do it.”

Expressing concern over the decline in FDI, he said, “We have discussed the decline in foreign direct investment. RBI must understand and initiate a study regarding what should be done to increase FDI and long-term capital inflows into the country.”

When asked what action would RBI take if the goods and services tax (GST) was implemented this year and inflation shot up further, Subbarao said, “We are watching the state-Centre dialogue on GST but it would be too early to comment on the steps we will take in the future.”

He evaded direct reply to a question regarding the Union Budget, he said, “We hope the central government will come up with fiscal consolidation.”

On mergers and acquisition of banks, he said, “On a global scale, our banks are small. Mergers and acquisitions should be an organic process.”

About the Malegam Committee report on microfinance, he said, “We will see how to move further. There will be a meeting next month with the state governments and various institutions. We will then implement the plan accordingly.”