RBI tightlipped on rate cut

The RBI is non-committal on rate cut at this stage and has indicated that it will take a call on September 17 when the monetary policy is slated for review.

“You cannot say when the rate cut will come. Wait for our September policy,” RBI Deputy Governor H R Khan said on the sidelines of a function organised by the Institute of Chartered Accountants of India (ICAI) in Bhubaneswar on Saturday. Khan also said RBI is taking steps to regulate capital inflow with focus on creation of non-debt capital, “We are trying to improve capital flows through FDI and NRI deposits.”

Khan’s comments come on a day when Union Finance Minister P Chidambaram asked banks to cut interest rates and keep EMIs at affordable levels to encourage sale of consumer durables that will have a domino effect on manufacturing.

‘Lower rates inflationary’

RBI Deputy Governor Subir Gokarn on Saturday said that trying to grow too fast would create an imbalance in the financial system of a country and fall in interest rates would lead to inflation. “Lower and stable inflation rates contribute to stability in the investment climate,” Gokarn said.

Speaking at the 7th Annual International Public Policy conference held at the Indian Institute of Management - Bangalore, Gokarn said that high and volatile inflation over long periods is negatively correlated with growth, adding that it also dampens the investment climate and reduces long-term growth.

He also talked about how the growth of the Indian economy is mainly governed by increased growth in the industrial sector, while services sector growth has not changed much in the recent past.

On protein food inflation, Gokarn said that according to statistics, India faced a ‘protein shock’ (rise in inflation in protein-based food) in 2009-10 when the monsoons were not favourable. “This year, there is risk of higher protein inflation owing to the probability of pulse prices going up,” Gokarn said. A fall in inflation in July has raised hopes of a rate cut by RBI. Inflation based on Wholesale Price Index (WPI) declined to 6.87 per cent in July from 7.25 per cent in June. It is, however, still above the RBI’s 5-6 per cent comfort level.