The Hindu : Business : ‘Current level of inflation unacceptable’

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Wednesday, May 21, 2008
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‘Current level of inflation unacceptable’

Y. V. Reddy expresses hope that it may start moderating following various government steps

Dr. Y. V. Reddy

MUMBAI: Reserve Bank of India Governor Y. V. Reddy on Tuesday described the current inflation rate that touched 7.83 per cent as “totally unacceptable” as it affects the poor instantly, but expressed hope that it might start moderating following various steps taken by it and the government.

“High growth benefits the poor with a lag, while inflation adversely affects them instantly... Hence the current high-level of inflation is, especially in terms of impact on inflation expectations,” Dr. Reddy said while delivering a lecture at the Institute of South Asian Studies, Singapore.

“As per indications, the currently elevated level of the wholesale price index may start moderating noticeably as monetary, fiscal, and administrative measures impact the economy, while other seasonal as well as global factors turn favourable,” he said.

He said the RBI’s monetary policy aimed at bringing price stability because of its impact on the poor “who have no hedge”. The central bank’s annual policy aims to bring headline inflation to around 5.5 per cent in the current fiscal with a preference for bringing it close to 5 per cent as soon as possible.

RBI’s resolve

However, the RBI’s resolve, going forward, would be to bring down inflation rate to around three per cent in the medium term in line with India’s broader integration into the global economy.

This objective was also consistent with India’s goal of maintaining self-accelerating growth over the medium term, Dr. Reddy said.

The RBI said the global financial turbulence had not affected the Indian financial markets, except for some increased volatility in the equity market, which was relatively more open.

The government securities market, forex market and the money market continued to be stable due to strong and sustainable external sector and adequate focus on liquidity management, he said.

Although high oil prices might impact trade account, the current account deficit was expected to continue to be modest due to strong invisibles, and it could be comfortably met by the anticipated net capital flows, he said.

Short-term prospects

Dr. Reddy said the short-term prospects for an impressive growth with a reasonable assurance of stability continued to be bright, though somewhat subdued by global uncertainties.

The fundamentals of the Indian economy do not warrant exaggerated bearishness that was being witnessed in some quarters now, just as exaggerated bullishness was not justified during some of the earlier periods, he added.

The RBI’s policy would continue to address the prevalent issues of containing the inflation expectations and sustaining the growth prospects, he said.

Referring to financial institutions, he said there were indications of continued improvements in efficiency and enhancement of resilience. “India has a bank-dominated financial sector, and banks in the country have a higher capital adequacy. The provisioning and risk-weight requirements have been tightened in a timely manner by the RBI to supplement monetary measures, in order to moderate early signs of overheating,” he said. — PTI

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