Need to push growth is higher on agenda than concern about inflation: Ahluwalia

The Reserve Bank of India, which chose to keep the key policy repo rate unchanged in view of high inflation, opted to err on the side of caution and decided not to take up the Finance Minister’s cue.

While lowering the CRR (cash reserve ratio) — a part of deposits that banks are mandated to park with it — by 25 basis points to 4.25 per cent to ease the liquidity situation in the festive season, the RBI left the signal repo rate unchanged in view of persistently sticky inflation, which now stands projected higher at 7.5 per cent through March 2013.

For the government, the only consolation is that the RBI has acknowledged the fiscal consolidation road map but it would like to see the impact of these measures before easing interest rates. Referring to RBI’s policy guidance, Mr. Chidambaram said: “I have not read the last few paragraphs of the statement but if it holds out hope for the future I look forward to that future…Sometimes it is best to speak, sometimes it is best to remain silent. This is the time for silence.”

However, Prime Minister’s Economic Advisory Council (PMEAC) Chairman C. Rangarajan, who headed the central bank earlier, appeared to appreciate the monetary policy dilemma and noted that the RBI may be able to ease interest rate only in January as inflationary pressures were likely to persist.

“Perhaps for a change in the policy rate, the RBI is waiting for a period or an opportune movement when there could be sustained decreases in interest rate…I think they would start doing it only in January, unless there is some strong tendency for inflation to decline in the next four-five weeks. That doesn't appear to be likely at the moment,” Dr. Rangarajan said.

Planning Commission Deputy Chairman Montek Singh Ahluwalia viewed the apex bank’s decision to cut CRR as “a step in the right direction” but felt that the need to push growth should take precedence over combating inflation at the present moment.

“I can see that the RBI remains concerned about inflation. I think we need to watch what happens in inflation but probably the need to push the growth at this moment is little higher on agenda than the concern about inflation,” he told journalists here.

At the same time, Mr. Ahluwalia felt that easing the CRR could also lead to easing of interest rates. “It was expected that they [RBI] would move in the direction that would be supportive of revival of growth. I do think that the reduction in the CRR is a step in that direction. Hopefully it would moderate pressure on the interest rates.

“We have to push for growth anyway. Monetary policy is very important aspect of the growth push, but most of what need to be done for growth, has to be done by the government and we are going to do it,” he said.

More In: National | News | Business | Economy