Ahead of the quarterly credit and monetary policy review on January 29, Reserve Bank of India Governor D. Subbarao, on Thursday, met Finance Minister P. Chidambaram for customary discussions on the prevailing macro-economic environment.

“Our next quarterly review policy is scheduled for Tuesday. As per standard practice, I have come to review macro-economic situation with the Finance Minister,” Dr. Subbarao told reporters here.

While details of what transpired at the meeting are not known, the government’s tilt in favour of easing interest rates to spur growth is well-known. So much so that ahead of the second quarter policy review in December, the Finance Ministry and the Finance Minister gave explicit hints that the apex bank would be going in for a rate cut but the RBI Governor chose not to oblige in view of persistently ‘sticky’ inflation.

The only solace for India Inc., which had been clamouring for a rate cut since the beginning of the fiscal year, was the indication given by Dr. Subbarao that the RBI could reduce its key lending rate in January, provided inflation showed a downtrend and adequate steps were taken by the government towards fiscal consolidation.

Tricky situation

This time round, for the third quarter review in January, which is being keenly watched by all stakeholders, the situation appears all the more tricky for the RBI Governor to take a call. For, apart from the government, industry as well as the markets, even bankers, both domestic and foreign, are expecting a cut in the repo (short-term lending) rate by at least 25 basis points, especially when the key interest rate has not been lowered since March on concerns of inflation.

Inflation at 3-year low

Significantly, with industrial growth contracting by 0.1 per cent in November, 2012, industry’s call for a rate cut has been louder. Alongside, however, while WPI (wholesale price index) inflation declined to a three-year low of 7.18 per cent in December, retail inflation based on the consumer price index (CPI) rose for the third successive month in December to 10.56 per cent.

The RBI Governor has already stated in recent days that inflation still remains way above the apex bank’s comfort zone and considering that the recent hike in diesel prices is certain to add its mite to the price spiral. Dr. Subbarao has a tough job on hand, more than ever.

However, through interviews during his roadshows in Hong Kong and Singapore during the week, the Finance Minister sought to clear the air on the general perception that the government and the apex bank were not on the same page on the growth-inflation scenario.

While in Hong Kong, Mr. Chidambaram stated that the RBI must strike a balance between needs of pushing growth and controlling inflation. However, explaining the divergence in views on the issue to a private TV channel in Singapore, he said: “The ball [decision on tweaking the repo rate] was always in the court of the RBI, the Finance Ministry or officials in the Finance Ministry express their views, we are naturally biased in favour of growth. The RBI has an obligation to contain inflation. They are not necessarily contradictory positions.”

“They can converge and when they converge, the governor will take a call. I think the governor is sensitive to the fact that just as high inflation penalises the people, low growth also penalises people. Low growth means fewer jobs, lower incomes, fewer self employment opportunities. I am sure the governor will bear all these in mind when he takes a decision,” Mr. Chidambaram said.

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