RBI open to another rate rise

May increase rates if inflation doesn’t come within RBI’s comfort zone: Chakrabarty.

With inflation still looming large, Reserve Bank of India (RBI) Deputy Governor K C Chakrabarty on Friday hinted the central bank was open to another increase in key policy rates.

During the previous policy review, Governor D Subbarao had indicated the chances of another rate increase were relatively low as inflation was moderate.

“The governor said it might not be necessary. That does not mean if there is a pause you cannot do it (raise rates). If it needs to be done, it can be done; that is his choice,” Chakrabarty said when asked if RBI was open to raising rates despite the pause indication in the November policy.

An accommodative monetary policy was not required at present due to the high growth rate, Chakrabarty said, on the sidelines of a Confederation of Indian Industry event here on Friday. The country’s food inflation rate, based on the wholesale price index, rose 8.69 per cent from a year earlier, compared to 8.60 per cent in the week ended November 20.

“We are already exiting an accommodative policy. Inflation is still a problem. We need an accommodative policy when growth rates are low, but our growth rate is reasonable,” said Chakrabarty.

Inflation continued to be a concern for RBI over growth. RBI might take some steps if the level of price rise did not come down to the central bank’s prescribed level of 5.5 per cent by March 2011, said Chakrabarty.

Under its accommodative stance, RBI infused liquidity through cuts in key policy rates during the economic slowdown. “For the central bank, the major concern will continue to be inflation, but we are not an inflation-targeted regulator. For us, growth, exchange rate and stability are important. But now, growth is not as much a concern as inflation,” he said.

In its review to Parliament on Tuesday, the government said growth in the year through March 2011 could even exceed nine per cent.

“Inflation is the price you pay for an accommodative monetary policy. Real interest rates are still negative. Poor depositors are sacrificing for growth,” said Chakrabarty.

To tame inflation, RBI raised the repo rate by 25 basis points to 6.25 per cent and the reverse repo rate by 25 basis points to 5.25 per cent last month.

“Peak level of growth has been achieved. Our growth might be 8.75 per cent or nine per cent this year. But if we want sustainable high growth, it cannot be done without low inflation. In the medium term, it cannot (be allowed to) exceed five per cent. We may achieve the nine per cent growth level, but the policy imperative is to keep the inflation level low,” said the deputy governor.