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RBI to be cautious in reducing interest rates: Chakrabarty

Chakrabarty said core inflation must be reduced to 1 per cent which will reduce down the cost of borrowings and expand the manufacturing sector

Zoaib Shaikh  |  New Delhi 

In what may dash hopes of various industry players for reduction of the repo rate, the Reserve Bank of India (RBI) today said it will be very cautious in reducing the interest rates.

A press statement by industry chamber Assocham said RBI deputy governor K C Chakrabarty said at its function that the central bank will be extremely cautious in reducing the interest rates as low interest rates should not result in collapse of the financial sector.

The statement also quoted Chakrabarty as saying that global economic crisis are due to low interest rates.

According to the chamber, Chakrabarty said core inflation must be reduced to 1 per cent which will reduce down the cost of borrowings and expand the manufacturing sector

Core inflation (inflation for manufactured products excluding food items) eased to 5.2 per cent in October from 5.6 per cent in September.

Further, dismissing the argument that high interest rate are responsible for slowdown in economic growth, he said high inflation has resulted in moderation of economic growth.

 "...what we are trying to say that interest rate is not the only reason for the slowdown in growth. But inflation is definitely a reason for slowing down the growth," he told reporters on  the sidelines of the Assocham Banking summit.
The RBI deputy governor said slowdown in the growth is for a variety of reasons.

"Yes, to the extent monetary policy is not able to control inflation and not effective. It is responsible. We cannot say something wrong is happening in the economy, we are not responsible. Collectively, we are all responsible," he added.
Responding to queries if 7 per cent inflation has become a new normal, he said that if global average of inflation is at 7 per cent, then that level should be considered normal in India as well.
"...if our economy is getting integrated with the global economy. What is the global average inflation, our inflation cannot be much different from that."
Markets are getting integrated, economies are getting integrated so you have to look for what is the average global inflation, he said.
WPI based inflation stood at 7.45 per cent in October.

Chakrabarty said there is enough liquidity in the system to take care of the lending activity of the banking system.
"I think liquidity is okay...whatever is the liquidity that is adequate and that comfortable. This is always monitored," he said.
In order to ease liquidity situation, the Reserve Bank had last month announced infusion of Rs 17,500 crore by reducing Cash Reserve Ratio (CRR) by 0.25 per cent to bring it to 4.25 per cent. However, the repo rate, has been retained at 8 per cent in its policy review on October 30.
The next policy review is scheduled in December. The industrial production has seen constant decline and contracted by 0.4 per cent  in September.
Industry lobby groups as well as the ministry have been asking the central bank to reduce interest rates. End

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First Published: Wed, November 21 2012. 17:19 IST