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Can't Abandon Inflation Agenda, Says India's Central Banker

Written by Gauri Bhatia, Reported by Lisa Oake
Monday, 13 Aug 2012 | 12:40 AM ET

Tackling high inflation remains the top priority for India’s central bank and it is the government’s responsibility to do more to spur growth in the weakening economy, Subir Gokarn, the Deputy Governor of the Reserve Bank of India (RBI) tells CNBC.

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The prospects for India’s economy remain poor given the global headwinds and policy logjam at home, prompting several economists to cut their GDP growth forecasts for the current fiscal year to around 5.5 percent from above 6 percent earlier.

Despite pressure to cut interest rates from Indian industry and businesses, which are feeling the pinch of a slowdown and high borrowing costs, the RBI has held its benchmark rate at 8 percent atits last two meetings, saying that it was not comfortable with current inflation levelsabove 7 percent.

“Clearly the argument is that if you cut rates, you will get some rebound, some stimulus for investment. But on the other side, we're dealing with a relatively uncomfortable inflationary situation. The inflation objective cannot be abandoned,” Gokarn told CNBC in an interview.

The current slowdown in Asia’s third largest economy is only in part because of global economic weakness and has a lot to do with domestic bottlenecks to investment, which the government has to clear, Gokarn added.

“We grew between 2003 and 2008 at close to 9 percent because many of these capacity bottlenecks that sort of held us down before started to get addressed through policy and I think that's the phase that we have to re-enter,” he said, adding, “the cost of not acting I think is becoming more visible.”

Gokarn said that holding rateswas the best the central bank could have done to balance the two risks of slowing growth and an acceleration in inflation. “The best outcome in terms of policy is to stay put,” he said.

At its last meeting end July the RBI raised its headline inflation projection for the fiscal year ending in March 2013 to 7 percent, from a forecast of 6.5 percent in April.

Is There Room for a Rate Cut?

Some economists have said the RBI is likely to resume its rate cutting cycle later this year. The central bank meets for another policy review in the middle of next month. It last cut rates by 50 basis points in April.

Since then the inflation outlook has worsened and current drought conditions are expected to put further pressure on food prices, which rose 11 percent year-on-year in June.

According to Gokarn, the possibility of a rate cut could emerge once the central bank sees certain policy actions that address both growth and inflation risks such as clearing supply bottlenecks to ease inflation, fiscal consolidation and an infrastructure push.

The recent power outage in India, which cut electricity supply to half of its 1.2 billion people highlights the urgent need for economic reforms in the country.

“As we see developments obviously that will give us the room to do that (rate cut),” he said. “As people, markets see these measures being put in place, it changes the view of the trajectory of how growth and of how inflation is going to perform. That is the kind of dynamic that we're really looking out for,” he added.

by CNBC's Gauri Bhatia

Follow Lisa Oake on Twitter: @LisaCNBC

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