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Responding to Reserve Bank of India (RBI) governor Raghuram Rajan's statement that the central bank will not keep interest rates high longer than warranted if disinflation persisted, Finance Minister Arun Jaitley said the latter process had already begun.
"Going forward, RBI should examine the liquidity situation, inflation and growth in setting policy rates," the finance minister said.
In a statement posted on his Facebook page, he said the recent data showed inflation was moderating.
Consumer Price Index (CPI)-based inflation fell to 7.31 per cent in June compared to 8.28 per cent in May. Wholesale inflation fell to a four-month low of 5.43 per cent against 6.01 earlier.
RBI stated its target of CPI inflation at around eight per cent by early 2015 seems likely. However, it was also necessary that the disinflationary process was sustained over the medium term.
"The balance of risks around the medium-term inflation path and especially the target of six per cent by January 2016 are still to the upside, warranting a heightened state of policy preparedness to contain these if they materialise," the central bank said. In the months ahead, government actions on food management and to facilitate project completion should improve supply. However, as consumer and business confidence pick up, aggregate demand will also strengthen, RBI said. "The Reserve Bank will act as necessary to ensure sustained disinflation," it added. Experts also believe RBI will hold rates for quite some time. On his part, Jaitley assured that the government was committed to narrowing the fiscal deficit and boosting investment. "The government remains committed to the path of fiscal consolidation and reviving the investment cycle, that will help bring down inflation and pick up growth further," he said. RBI's statement based its projection of 5.5 per cent economic growth rate for the current financial year on the ongoing fiscal consolidation process of the government, which would release resources for private enterprise, among other factors.
The Centre's fiscal deficit had crossed 56 per cent of the year's budget estimate in the first quarter of the financial year. The government has aimed to bring down the fiscal deficit to 4.1 per cent of gross domestic product in 2014-15 from 4.5 per cent in 2013-14.
"As the economy picks up and demand grows, this will allow an increase in bank credit," said the minister.
