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RBI cannot focus on inflation only: Subbarao
Published on 13 Feb. 2010 11:58 PM IST
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Reserve Bank of India’s governor said on Saturday that the bank could not just focus on inflation given growth concerns. Duvvuri Subbarao also said that the large government borrowing influences monetary policy stated Reuters. At its policy review on January 29, the RBI raised banks’ cash reserve requirements by 75 basis points to 5.75 percent but left benchmark lending and borrowing rates unchanged at 4.75 percent and 3.25 percent respectively. Calls for rolling back fiscal stimulus and further monetary policy action to prevent the economy from overheating got louder on Friday as industrial production in December 2009 rose the most in living memory amid strong demand for cars, consumer goods and machinery, all aided by cheap money. As calls for action grew in India, neighbouring China sprung a surprise by increasing banks’ reserve requirements that could slow down lending and help tame rising inflation. “You cannot be on life-support system for good. The Centre needs to start unwinding the stimulus. This has to be done gradually, but can be started in the Budget,” said Suresh Tendulkar, former chairman of the PM’s Economic Advisory Council. “Companies have begun taking up new projects. Financial institutions have also started lending more. The investment scenario is now almost similar to the pre-Lehman Brothers’ collapse era.” Industrial production grew 16.8% in December 2009 from a year earlier, boosted by a 46% increase in consumer durables and a 38.8% jump in capital goods, indicating both consumer demand and investments are accelerating. There is room for statistical illusion here given that manufacturing contracted 0.6% in December 2008. Mining rose 9.5%, while electricity generation grew 5.4%. A series of economic data, including car sales, point to acceleration of economic growth that could push inflation beyond the upwardly-revised Reserve Bank of India’s target of 8.5% for the fiscal year. Any sharp appreciation in prices could make it difficult for the government to borrow funds for social schemes next year, as yields on government bonds that are at 16-month highs may climb further. The RBI stopped short of raising interest rates, but increased the cash reserve by 75 basis points on January 29 as it waits for the government to signal a return to fiscal discipline. While some economists, politicians and poor worry about inflation, policy makers have a sense of achievement after pumping in record liquidity to get the economy to return to near 9% growth achieved before the crisis levels. Finance minister Pranab Mukherjee is hoping for a 7.75% growth, while RBI says it could be 7.5%. The Central Statistical Organisation (CSO) has forecast 7.2% for the year ending March 2010. “It (IIP growth rate in December) is quite encouraging and I do hope that third-quarter GDP figures will also be encouraging... it will get reflected in the overall GDP,” Mr Mukherjee told reporters after the industrial production data was released.

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