Thiruvananthapuram: Reserve Bank of India (RBI) Governor Duvvuri Subbarao stuck to a hawkish tone on Monday, emphasising his concern that inflation remains too high and again prodding the government to restrain its own borrowing.
Since cutting its main interest rate in April by a bigger-than-expected 50 basis points to 8 per cent, the RBI has stayed on hold, reiterating its message that bringing down inflation is its top priority even as economic conditions deteriorate.
"The task for the RBI is to restrain demand. What is the task for the government? The task for the government is to generate supply so that we produce more and that will bring down inflationary pressures," Subbarao said in a speech at a event in south India.
India is expected to report on Tuesday that headline wholesale price index inflation edged higher in July to an annual 7.37 per cent from 7.25 per cent in June, according to a Reuters poll of economists.
Data that either matches or comes above June WPI levels would likely reduce expectations for interest rate cuts. The RBI's next scheduled policy review is on September 17.
Subbarao said on Monday that India was seeing lots of inflationary pressures in the economy, though he attributed some of those to demand factors, and not just supply shocks.
Last week a handful of economists cut their gross domestic product (GDP) growth forecasts for the current fiscal year to around 5.5 per cent, adding to doubts about the outlook for Asia's third-largest economy. Growth of 5.3 per cent in the March quarter was India's slowest in nine years.
Subbarao also said declining investment was a cause for concern, and that domestic factors were pulling down growth. He added that the RBI does not have adequate room through monetary policy to respond to a crisis arising from global factors.
At its last review, the central bank raised its headline inflation projection for the year ending in March 2013 to 7 per cent from 6.5 per cent, while lowering its GDP growth forecast to 6.5 per cent from 7.3 per cent.
Subbarao has maintained his hawkish stance on inflation despite slowing growth. On Monday, he said the country needed to expand much faster than 6 per cent, calling India an outlier since growth is slowing while inflation has not.
He said deficit spending by the central government and states is adding to inflation.
"Those fiscal deficits are going into government expenditure, which is consumption expenditure, that's going into people's hands, they are consuming more. That is increasing demand and that is adding to inflationary pressures," he said.
His comments come a week after newly appointed Finance Minister Palaniappan Chidambaram said high interest rates were burdening consumers. Bond prices rallied after Chidambaram's remarks, as investors bet the government would start pressuring the RBI to cut interest rates.
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