Calibrated steps to tame inflation failed: Subbarao

The Reserve Bank, on Tuesday, admitted its calibrated steps aimed at cooling inflation have not resulted in desired effects so far, but expressed confidence that its ''hawkish'' stance would help contain rising prices now on.  “You are quite right in questioning the reliability of RBI’s inflation predictions and also the ability of RBI in containing it," Governor Duvvuri Subbarao said in his customary post-policy meet when asked whether he was sure to meet the 6 per cent inflation target for this fiscal. But he quickly added, “Over the year, we expect to be preoccupied with inflation control and hope to regain our credibility in predicting more accurately.”  However, to a question whether RBI was behind the curve in containing inflation, the Governor answered in the negative and said as the nature of inflation has suddenly changed with many known unknowns (commodity and crude prices, geopolitical unrests in the Middle East and North Africa, and the impact of Japanese tragedy etc) coming into effect. Explaining the reasons for the calibrated approach to batten down inflation, he said,  “Why we consistently under-predicted inflation was that last year’s inflation surge was due to a series of unpredicted supply-side pressures. But now many known unknowns have increased and hence the hawkish measures.” “When we started tightening, that was needed to sustain the growth momentum. The aim of monetary policy was then to check inflation by discouraging demand and thus help the economy for a soft-landing,” he added. “But over time this led to a dramatic change in the growth-inflation dynamics. Over time, food-driven inflation has given way to manufacturing inflation. As a result all the risks to inflation are up now,” Subbarao said. Subbarao also admitted that RBI’s inflation numbers for December 2010 to February 2011 went off the track hence March prediction also went off the track and he attributed this mismatch to a series of factors and variables which were at play. The surge in vegetable prices in December and January were quite unexpected, he pointed out. Pointing out that the known unknowns increased overtime, the Governor said since there was no cooling in demand the producers could pass on the input cost increase to consumers, thus pushing up price-pressure. On the view that a higher growth can be a trade-off for high inflation, the Governor was categorical in stating that “we don’t subscribe to that view and that we would rather compromise growth in the medium term to cool inflation off.” On the impact on the hawkish approach to GDP, the Governor said, “We have talked through the GDP numbers, which could be around 8 per cent or a little above or below it.” He also added that industrial growth may take a further hit due to inputs cost rise but private demand may be sustained. However, government investments are to be seen and so is the monsoon forecast to have a better perspective on the actual impact.