Subbarao defends policy stance, warns of 8 pc inflation

 RBI Governor Duvvuri Subbarao today defended the bank's decision to keep the key policy rate unchanged saying inflation could rise to above 8 per cent in the near-term.

He said the move to marginally slash the cash reserve ratio was aimed at making available liquidity for productive lending. Subbarao was speaking to reporters at the customary post-policy meeting after unveiling the second quarter review of Monetary Policy for 2012-13.

The RBI Governor, who suggested a reasonable likelihood of further policy easing in the fourth quarter of this fiscal year, was evasive on whether he will slash the policy rates in January.

Subbarao said he may take some action in the next policy review. The third quarter review of monetary policy is scheduled for January 29, 2013.

"If we see that inflation is likely to be coming down even in the January-March quarter, we may take some action in January. But I cannot say anything beyond that," Subbarao said, adding "at its peak, inflation will go up to beyond 8 per cent".

"Looking at the current balance between growth and inflation risks, we thought it is appropriate to maintain the policy rate where it is, (which is) just a little bit above the inflation rate; also considering that inflation is going to go up in the next few months," he said.

Subbarao, who chose to focus on inflation worries over boosting the steeply fallen growth rate in the policy by cutting the policy rates, described his choice as a "complex challenge" and cited high fiscal and current account deficits as inhibiting factors for an easy money policy.

"We have had to restrain demand, even while ensuring flow of credit to productive sectors so as supply constraints are eased," Subbarao said.