Reserve Bank of India Governor Duvvuri Subbarao commented on inflation, monetary policy and the rupee in an interview with Bloomberg TV India today. He kept the benchmark repurchase rate at 8 percent yesterday to damp price increases, while reducing the cash reserve ratio to 4.25 percent from 4.5 percent to support lending.
On shared goals:
“Both the government and the RBI have shared goals, which is that we want to see growth improving, we want to see inflation coming down and remaining at low levels, and the collective endeavor as well as our individual efforts are focused on achieving those objectives.
“The government has moved very firmly, very decisively, particularly over the last months to ease the supply concerns in the economy and inspire confidence of investors, so that growth improves and inflation comes down, and that has been the effort of the RBI as well. Although, we thought more about inflation, we have also spoken about our concern about growth and yesterday’s action was, I believe, aimed at restraining inflation even as we encourage drivers of growth.
On the rate decision:
“We maintained our policy rate at 8 percent to signal our anti-inflationary stance, we reduced the CRR to ensure that there is comfortable liquidity to ensure that there is flow of credit to the productive sectors of the economy. My expectation is that the CRR cut yesterday will enable the excess capacity in the economy to be utilized fully and then the investments take place.”
On the fiscal deficit:
“Not just the Reserve Bank of India, for all the stakeholders in the economy, the quantum of fiscal adjustment is important but the quality of fiscal adjustment is also important.
“The only variable available for cutting expenditure is subsidies. Leakages need to be minimized. I would say that the goal of minimizing subsidies to 2 percent of GDP, that is what we should be working towards.”
On the rupee:
“The RBI manages volatility in the exchange rate and doesn’t target the exchange rate. The extreme volatility that we saw in the first half of this year has subsided somewhat but I also want to caution that we cannot take this for granted because it’s a situation beyond our control.
“The exchange-rate volatility is the reflection of global uncertainty and there has been some calm in the recent months in the global situation. But again there are several trouble spots, where there could be some problems. So, we’ve got to be vigilant about that.”
“We have not changed our comfort level of inflation. It’s still 5 percent. We believe we need to bring inflation down to 5 percent so that our economy is competitive, so that investors and consumers can make informed decisions.
“As supply concerns ease, as the global situation improves, as the monetary policy works through the system, I believe that we can bring inflation down to 5 percent. It may take a little longer than what we had thought.”