It's early to act on inflation: RBI

It's early to act on inflation: RBI

Governor Subbarao says country will benefit from global recovery if exports rise

It's early to act on inflation: RBI

“You have to be sensitive to inflation concerns, but it is too early to be taking action for inflation,” Subbarao told reporters here after a seminar. “We are sensitive and mindful of what’s happening,” he added.

RBI’s stance suggests it will wait for inflation, which has been in the negative territory for eight consecutive weeks since early June, to creep up before embarking on any reversal of its expansionary policies.

“However, we are aware that sometime down the line pressure could hit us, and certainly when signs of inflationary pressures show up, we will take action,” he said adding, that the RBI is monitoring the situation.

On monsoon and its possible impact on prices, he said: “I think there is still hope for agriculture, there is still the rabi season ... I see that even if there is rainfall now, it’s possible to recover some of the lost ground.”

On food price inflation he said, “I am unable to say to what extent the current ground situation will translate into pressure on prices and at what point of time Reserve Bank will act.”

Subbarao said while wholesale price index (WPI) is coming down, there are other inflation numbers (like the consumer price indices) that are stubborn. “When you aggregate all your information into one number, you will lose some detail and within the RBI we try to retain that detail in our policy management,” he said, adding primary and food articles inflation is significant.

Revamp banking
Meanwhile, taking a cue from the Finance Ministry, which recently came out with a draft for a new direct taxes code that would ultimately replace the Income Tax Act, 1961, he said it would be a good idea to streamline the banking regulations under one code as well.

“... there are several Acts and entire banking regulation is spread across different statutes and different regulations and it might be useful to bring it all under one code,” Subbarao said.

On the possibility of overhauling the banking regulations, he said “that’s something that has been told to me ... something desirable obviously.” Further, Subbarao expressed comfort to the US belief that they have leveled out and the worst is over.

“We will benefit from the global recovery, if exports pick up and if capital flows come in, as I said in a measured manner. “If the world recovers, its certainly good for our economy,” he said.  Subbarao said making monetary policy independent of fiscal policy is an important reform measure for the country. Saying that coordination between monetary and fiscal policies has become a challenge, he said the government’s huge borrowing programme came in the way of the monetary policy objective of a lower interest rate regime.

RBI cut its policy rates several times since October “hoping interest rates will come down, but the borrowing programme militated against it,” Subbarao said. “The challenge going forward is to manage coordination between monetary and fiscal policy...this very rapid expansion in the borrowing programme has impeded monetary transmission,” he added.  
In the midst of global financial crisis, central bank governors have become unlikely heroes. “Some of them have rock star status” as they are seen as part of the solution. However, he added, some people are asking whether the central banks are part of the problem.

The questions that are now being raised include was the mandate of the central bank clearly defined, were there flaws in the accountability mechanisms, did the objective of financial stability fall through the cracks, Subbarao said. “... you can’t define it (financial stability). It’s like pornography, you can’t define it but when you see you know it,” he said, adding that the central banks and governments have become increasingly dependent on each other.

Subbarao said the economic growth rate projection of 6.5 per cent stood good even now and pointed out that the RBI would not discuss in the public domain any mid-course policy corrections.

Transfers surplus profits
It’s like pornography, you can’t define it but when you see you know it,” he said, adding that the central banks and governments have become increasingly dependent on each other. The Reserve Bank of India, on Friday, said it would transfer its surplus profit of Rs 25,009 crore, or 66.6 per cent higher over the last year, to the Centre for the year ended June 30.

“The Reserve Bank’s Central Board, in its meeting held today, approved the transfer of surplus profit to the Government of India amounting to Rs 25,009 crore for the year ended June 30, 2009,” RBI said. The corresponding figure for the last year, ending June 30, 2008, was Rs 15,011 crore.

Cancels cos registration
Further, RBI has cancelled the certificate of registration granted to three companies for carrying on business of non-banking financial institution .

These are Seven Heaven Leasing and Finance , Internet Investment Company and Associated Fincap Ltd. The licences have been cancelled as these companies have opted to exit from the business of a non-banking financial institution.

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