RBI may not cut interest rates in view of high inflation

The Reserve Bank today indicated that it may not cut interest rates to boost growth in its month-end monetary policy review as inflation is still high.

The Reserve Bank today indicated that it may not cut interest rates to boost growth in its month-end monetary policy review as inflation is still high.

"We are way above the threshold on inflation. It,however, does not imply any action to be taken by the RBI," central bank Governor D Subbarao said at a function here. "WPI inflation at 7.25% and CPI at double digits, certainly we are above the threshold," he said.

The statement come two weeks ahead of RBI's quarterly monetary policy announcement on July 31.

Inflation, as measured by the Wholesale Price Index (WPI), was 7.25% in June much above the comfort level of 5-6%. At the same time, Consumer Price Index for May was 10.36%.

With economic growth hitting nine-year low of 6.5% in 2011-12, the industry has been demanding rate cut by RBI to promote growth.

In its bid to rein in inflation, the Reserve Bank hiked key policy rates 13 times, totalling 350 basis points, between March 2010 and October 2011.
    
Since January this year, RBI has resorted to injecting liquidity into the financial system by reducing cash reserve ratio for banks. Besides, it has called for fiscal steps by the government to combat inflation.

However, RBI in its monetary policy review last month had refrained from reducing rate in view of high inflation and deteriorating global climate.

RBI has projected inflation to be around 6.5% by March 2013, with a caution that it will remain sticky and that there was a need to arrest the decline in economic growth.

Meanwhile, Subbarao released a book on collection of articles written by former RBI Governor I G Patel. The book has been edited by another former chief of the central bank Y V Reddy.

Earlier in the day, Planning Commission Deputy Chairman Montek Singh Ahluwalia said, "it (inflation) has eased a little bit but I think that it is still a matter of concern. But it is good that it has eased. Let's see how it moves in
future."

Inflation is above the budget forecast. Finance Ministry's projection is that it might go down to 7% in few months, he said, adding that slowing down is reflective of that which is good.

"I think the whole inflation scenario is a matter of concern ... for some time food inflation has been the problem. Inflation is high mainly because of food and non-core elements. We hope that we will be able to bring it down..still a problem," he said.