RBI chief isolated in battle against inflation

For months, the hawkish, inflation-fighting RBI has been in a shrinking minority of its emerging market peers. Now the recently re-appointed central bank governor is facing stiff opposition to his crusade at home. As recently as last week, the RBI made clear it will stick to its anti-inflationary stance despite censure from the Congress-led government that is signalling 12 rate rises within 18 months are hurting growth and its electoral prospects. India's inflation is near 10%, one of the highest among major economies in the world. It is among a handful of countries such as Kenya and Nigeria still raising rates while the world frets over headwinds from a European debt crisis and a sputtering US economy. Neighbours in Asia have turned dovish, some such as Brazil and Turkey have already cut interest rates. Subbarao appears undeterred by the criticism. RBI sources say he is determined to keep policy tight, maybe even tighten it further. "Growth has a floor, but inflation has no ceiling," said a senior RBI official with direct knowledge of monetary policy making. "If we don't do anything, inflation expectations will rise." Until now, the government and the RBI have largely been on the same page when it comes to monetary policy, with near double digit inflation not only an economic 'worry but a political headache as prices of foods and fuel jump. But over the past few weeks, criticism and advice for the RBI chief have been more blunt than usual. "I have had hesitation on a rate hike this time which in the past I did not", Kaushik Basu, chief economic advisor to the finance ministry, said after the RBI raised the repo rate by 25 basis points on Friday. "I would personally, yes, vote for pause", he told reporters when asked what the RBI should do at its October policy review. Basu is a top adviser in the finance ministry and is known to be not only close to finance minister Pranab Mukherjee but also a key strategist on economic policy, one who often echoes Mukherjee's thinking on key issues. The top adviser, who was widely believed to be in the race for the RBI top job, has asked the central bank "to think out of the box" and consider the examples of Brazil and Turkey that cut rates to protect growth. Montek Singh Ahluwalia, the deputy chairman of Planning Commission and Prime Minister Manmohan Singh's close advisor, also questioned Subbarao's monetary action. 

The Sunday Guardian