Controlling inflation is top priority, says RBI

Rising prices may make it difficult for central bank to implement rate cut

The Reserve Bank of India has once again reiterated that controlling inflation is its top priority, which has dampened the hope of a rate cut in upcoming mid quarter policy review scheduled on September 17.

"Controlling inflation has always been a priority for the central bank," RBI deputy governor, KC Chakrabarty said at an event today. Wholesale price index (WPI) -based inflation rose to 7.55 per cent in August after falling below 7 per cent in July, data released by government today showed.

The US Federal Reserve's QE3 announcement -- made last night -- could push up commodity prices, Chakrabarty added.

 

Yesterday, US Fed's chairman Ben Bernanke kept the rate unchanged and announced buying of $ 40 billion dollars mortgage backed securities per month.

Rising commodity prices will push up prices, making it difficult for the central bank to cut rate. In the first quarterly monetary review announced on 31 July RBI had raised its inflation outlook to 7 per cent and revised growth target for the year at 6.5 per cent. RBI, after reducing interest rate by 50 bps in April, maintained status quo in the next two policy review. On Monday, the central bank will announce its mid quarter review and there is a consensus among market participants that the repo rate will be left unchanged.

On Thursday, government had taken the long pending decision to increase the price of diesel by 5 Rs which is expected to reduce subsidy burden the government by around Rs 20,000 crore. It had also decided to cap the subsidized LPG cylinders at 6 per family per year. The diesel price hike will help the government on the fiscal front, which is a long standing demand from RBI.    

When asked when the interest rates are likely to come down, Chakrabarty said, “even god cannot predict the interest rate. Anyone who can (predict) interest rates or currency rates will earn billion of dollars. Nobody can do that. All you can do is adjusting yourself with the interest rates.”