Interest rate cuts only if inflation eases: RBI
BANGALORE: Reserve Bank governor D Subbarao indicated on Saturday that
the banking regulator would reduce interest rates further only if
inflation continues to ease.
RBI has been lowering the cash reserve ratio (CRR) and benchmark interest rates since January last year, with inflation in this period dropping from 11% to about 7%.
Speaking at a function organized by the Federation of Karnataka Chambers of Commerce and Industry, the governor said that the country's economic climate was a cause for concern. He said growth for 2012-13 was at a relatively low 5%, inflation was still high at 6.8%, and the current account deficit stood at 5% of GDP, historically the highest.
"Investment is decelerating, which by far is the biggest cause for concern because today's investment is tomorrow's production capacity," he said. He added that the economic situation today was more a consequence of domestic factors than global factors.
The governor noted that the three big factors keeping inflation levels high were food prices, global commodity prices, particularly of oil and gold, and demand pressures.
"Today we are seeing structural food inflation. The poorer segments of the population are seeing an increase in their incomes, and consequently their dietary habits are changing. People are shifting from cereals to proteins," Subbarao said. He estimated that over the past five years rural wages had gone up 20% year-on-year.
"People are eating more of eggs, meat, milk, vegetables, pulses, and fruits. This shift in food habits from cereals to proteins is what's causing food inflation," he said.
RBI has been lowering the cash reserve ratio (CRR) and benchmark interest rates since January last year, with inflation in this period dropping from 11% to about 7%.
Speaking at a function organized by the Federation of Karnataka Chambers of Commerce and Industry, the governor said that the country's economic climate was a cause for concern. He said growth for 2012-13 was at a relatively low 5%, inflation was still high at 6.8%, and the current account deficit stood at 5% of GDP, historically the highest.
"Investment is decelerating, which by far is the biggest cause for concern because today's investment is tomorrow's production capacity," he said. He added that the economic situation today was more a consequence of domestic factors than global factors.
The governor noted that the three big factors keeping inflation levels high were food prices, global commodity prices, particularly of oil and gold, and demand pressures.
"Today we are seeing structural food inflation. The poorer segments of the population are seeing an increase in their incomes, and consequently their dietary habits are changing. People are shifting from cereals to proteins," Subbarao said. He estimated that over the past five years rural wages had gone up 20% year-on-year.
"People are eating more of eggs, meat, milk, vegetables, pulses, and fruits. This shift in food habits from cereals to proteins is what's causing food inflation," he said.
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