RBI admits it’s lost its way on inflation management

RBI Governor D Subbarao said inflation management has not been proceeding the way policy makers expected it to go.  “Inflation management is not happening along the lines we were expected to,” Subbarao told analysts and investors in a conference call. “Demand-side pressures are abating because of our monetary policy.”  The RBI governor raised inflation forecast as rising prices threatens to shoot past the expectations for the second fiscal. He had raised rates seven times since March. Policy rates were raised 25 basis points on Tuesday, meeting market expectations, and he raised inflation forecast for the fiscal by 150 basis points to 7%. That led to criticism that the central bank’s inflation forecast and policy measures were not up to the mark. Inflation is at more than 8.4%. Food inflation has remained stubbornly above 15% for weeks as unseasonal rains damaged crops and rising income is leading to higher demand.  The bureaucrat-turned-monetary policy maker who had questioned the reliability of many data from the government, said factors that RBI takes are more or less what are available to analysts. “Increasingly, the central bank is working on the principle that there is no asymmetry between information that we have and that analysts have,” said Subbarao.  The index of industrial production fluctuates violently. The IIP grew 9.5% between April and November but it swung between 3% and 16%.  Mr Subbarao further said: “Liquidity deficit is independent of the government cash balances. Our comfort level is plus or minus 1%. This is linked to the statutory liquidity need. You should read this as comfort zone, irrespective of the transient factors. I don’t see it getting into a surplus. But certainly, we want to see less of it,” he added. Newly-appointed deputy governor Anand Sinha said: “So far as the increase in interest rate is concerned, it has to be a result of the monetary policy. But banks have to manage the issue of delinquency arising out of higher interest rates... Banks have to take care of their liabilities.”  Deputy Governor K.C.Chakrabarty said: “Risks are there. It depends on both the borrower as well as the bank.”