The monsoon outlook is going to be an important factor in determining Reserve Bank of India’s monetary policy in the next three months, according to Reserve Bank of India (RBI) Governor D. Subbarao.

Delivering the Institute of Public Enterprise’s (IPE) golden jubilee lecture on ‘India’s macro-economic challenges: Reserve Bank perspectives” here on Friday, he said the RBI was keeping track of growth, inflation and balance of payments. And importantly, it was chasing the monsoon.

Referring to India’s growth story, he said the story was promising and credible as the pre-crisis drivers were still there. The promise of increased productivity, demographic dividend, decent legal system, and the enormous depth of capacity would be the big growth drivers.

He said the average growth during pre-crisis period was 8.7 per cent, and it started fraying beginning with the global financial crisis of 2008-09. In the current macro-economic situation, he said the growth had significantly moderated, inflation came off from the peak but there were several upside risk factors, balance of payments was under stress and investments had decelerated. Describing as “disturbing” the deceleration in investments, he attributed the slowdown to external and domestic factors. Dr. Subbarao said there were three macro-economic policy challenges — managing growth-inflation, mitigating vulnerability of the external factor, and managing the political economy of fiscal consolidation. He said that inflation, which was in double digits in 2010-11, came down to below 5 per cent in 2012. Inflation was driven by food inflation (both cyclical and structural), global commodity prices, depreciation, and demand pressures.

He said the growth-inflation dynamics of pre-crisis growth was quite different from post-crisis. Referring to criticism of RBI’s management of growth-inflation dynamics, he said it was not fair to say that tight monetary policy had not reined in inflation. He pointed out that inflation had come down from double digits. Admittedly, growth had moderated, and it was inevitable to sacrifice growth to manage inflation, he added.

Emphasising the need to reduce current account deficit (CAD) to sustainable levels, he stressed the need for controlling fiscal deficit. He said fiscal deficit exacerbated inflation pressures, impeded monetary transmission, and inhibited supply response to inflation by crowding out the private sector.

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