Rediff.com« Back to articlePrint this article

RBI may hike interest rates in phases

December 07, 2009 11:42 IST

The reversal of easy monetary policy would be a gradual process as the central bank is focusing on striking a balance between growth and inflation, Reserve Bank of India Deputy Governor said.

"When you talk of exit policies, you have to see it as a graded process and not a one-off approach. Focusing on growth for one year to abandoning growth to focus on inflation is a transition. Growth number is one input. It is not the only factor," Gokarn, who was recently appointed to the post, told reporters on the sidelines of the Ficci-ICC CEOs Forum.

RBI has slashed its policy rates several times after October 2008 to help the economy deal with the global financial meltdown. However, in its October 2009 review of the monetary policy, it raised the statutory liquidity ratio (SLR) by 1 percentage point to 25 per cent, which hinted at unwinding of its easy money policy stance.

SLR is the proportion of current and time deposits that a bank has to keep with RBI.

With gross domestic product growth of 7.9 per cent recorded in the July to September quarter this year, there has been speculation that RBI may tighten monetary controls to rein in inflation, especially in food products.

Inflation numbers, Gokarn said, are giving divergent signals between the rise in food prices and those of manufactured items.

"You have huge divergence here and it is a little unfair to say that we should be looking at only 17 per cent (food inflation) and not at 1.34 per cent (overall inflation). We have to take all perspectives on inflation. The significance of food inflation is that it is a risk that translates into a wider spiral through expectations. That is something we have to be concerned about," he added.

Gokarn said RBI's focus has now shifted from just promoting economic growth to striking a balance between economic expansion and curbing inflation so that the recovery is not affected, while at the same time inflationary pressures do not go out of control.

On Friday, KC Chakrabarty, also RBI Deputy Governor, had said that the central bank would take a call on its monetary policy stance after reviewing the sustainability of second quarter growth numbers and its impact on farm growth in the next quarter.

A day earlier, another RBI Deputy Governor, Usha Thorat, had said that RBI would reassess its accommodative monetary stance in light of the rising food prices.

BS Reporter in New Delhi
Source: source image