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Struggling with growth-inflation dynamics: RBI

Reuters
Mar 10, 2011 at 05:50pm IST

Pune: The Reserve Bank of India (RBI), widely expected to raise interest rates again next week, is struggling with its dual objectives of containing inflation and promoting growth, its governor said on Thursday.

"Growth-inflation dynamics, we are struggling with that. We recovered from the crisis sooner than other countries. Inflation also caught up with us sooner than other countries," said Duvvuri Subbarao, governor of RBI.

The RBI has raised its key lending rate, or repo rate, seven times by a total of 175 basis points since March 2010, and is expected to raise it by another quarter point on March 17 at its mid-quarter review.

Struggling with growth-inflation dynamics: RBI

The RBI has raised its key lending rate seven times by 175 basis points since March 2010.

"For inflation management we have to raise policy interest rates. For protecting, promoting and preserving recovery we need to keep interest rates low, so there is tension between raising interest rate policy and keeping them low," Subbarao said.

"There are many arguments for keeping rates low or raising rates and that's what we are struggling with," Subbarao added.

The RBI expects India's economy to grow at 8.5 per cent, with an upward bias, for the fiscal year that ends this month.

For 2012, Finance Minister Pranab Mukherjee said last week he expects the Indian economy to grow at 9 per cent, plus or minus 0.25 per cent, in the next fiscal year, which is above many private forecasts.

High inflation has been the key driver for the RBI's recent policy moves.

India's food and fuel inflation eased in late-February 2011, but remained at elevated levels, maintaining the case for further monetary tightening to keep a lid on headline inflation.

India's food price index rose an annual 9.52 per cent in the week to Feb. 26, slower than a 10.39-per cent rise in the previous week as prices of vegetables, potatoes and rice declined, data showed on Thursday.

The fuel price index climbed up 9.48 per cent in the same week from 12.56 per cent a week earlier.

Headline inflation in January was at 8.23 per cent, well above the RBI's perceived comfort zone of 4-5 per cent and compared with its end-March 2011 target of 7 per cent.

Brent crude rose for a second day on Thursday to surpass $116 per barrel. It reached a 2-1/2-year high of $119.79 on Feb. 24. U.S. crude gained 44 cents to $104.65, after touching a 2-1/2-year peak of almost $107 earlier this week.

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