Subbarao hopes lending rates will drop once inflation eases

On foreign capital, says RBI prefers long-term FDI flows over portfolio ones.

Even as the Reserve Bank of India (RBI) is deep into its monetary tightening cycle, Governor D Subbarao on Tuesday said he hoped banks would be able to slash lending rates once inflation declined.

“As inflation eases, we hope lending rates to come down,” he said in response to questions from residents of Vengoor village near Kochi.

Six days ago, Subbarao raised the inflation forecast for March to eight per cent, as against the seven per cent made in January. The central bank raised the repo and reverse repo rates by 25 basis points to 6.75 per cent and 5.75 per cent, respectively. Over the last year, the two key policy rates have seen rise of 175 and 225 bps, respectively.

Economists expect RBI to raise rates by another 50-75 bps in the next six-nine months. Taking cues from the apex bank, banks, too, are expected to raise their lending rates.

The governor visited Vengoor as part of the central bank’s outreach programme. While addressing students of the Shankaracharya Sanskrit University earlier in the day, Subbarao said RBI would ensure growth was not hit and inflation was controlled.

“We will do everything possible to contain inflation without hurting growth,” he said. RBI has so far been calibrated with its rate increases to ensure its moves didn’t shock the markets.

Despite the recent moderation, RBI was sensitive to the fact that inflation was still high, Subbarao said. Though the wholesale price index-based inflation had eased, it still remained at elevated levels, he noted. Headline inflation for February stood at 8.31 per cent, as against 8.23 per cent in the previous month.

Maintaining price stability was RBI’s main purpose, Subbarao said, reiterating the monetary policy stance continued to be anti-inflationary.

“Maintaining price stability is one of the main purposes of RBI’s regulatory functions,” he said. From a medium-term perspective, RBI wants inflation to be around 4-4.5 per cent.

When asked about capital flows, the governor said RBI preferred foreign direct investment (FDI) flows over portfolio ones as the former came with a stable and long-term investment perspective. “We prefer FDI as it is coming in with long-term perspective,” Subbarao said.