After inflation, CAD haunts Reserve Bank

After inflation, CAD haunts Reserve Bank

RBI Chief D Subbarao says monsoon will play key role in the apex bank's monetary policy decisions over next three months Hyderabad: Reserve Bank...

RBI Chief D Subbarao says monsoon will play key role in the apex bank's monetary policy decisions over next three months

Hyderabad: Reserve Bank Governor Duvvuri Subbarao who succeeded in controlling inflation through tighter monetary policy regime strongly felt on Friday that widening current account deficit (CAD) had become biggest risk factor to the Indian economy now.

"It has been a concern for the RBI as to how to calibrate the monetary policy in the wake of high CAD. When we cut repo rates and cash reserve ratio in May this year, we have internally debated whether interest rate cut was warranted in view of the high CAD and went ahead with easing as inflation came down," Subbarao said while delivering Golden Jubilee Lecture on 'India's macro-economic challenges: Reserve Bank perspectives' organized by Institute of Public Enterprises (IPE) here.

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But, after the decision to cut the rates, many questions were raised as to how we could reduce interest rates when the CAD was high, he added. Subbarao further said: "We all know that the economic reforms in 1991 were triggered by balance of payment (BoP) crisis. But afterwards, we have taken external economic factors such as BoP for granted and in fact such factors had acted as buffer whenever there were problems on the other fronts. But strangely, the current account deficit has been widening in the last two years and will be around five per cent of GDP for the last fiscal".

The RBI Chief, who reminded that the CAD during 1991 economic crisis was just three per cent, blamed deceleration of exports and spike in imports of gold, oil for increase in CAD this time around. Subbarao said there are three concerns about India's CAD. These are quantum of CAD, quality of CAD and financing the CAD. The increase in the deficit above the sustainable levels year-on-year is certainly going to add the pressure, he added.

The RBI Chief also said that its monetary actions in the coming months would be determined by the outlook on monsoon and ensuing impact on inflation."Most importantly we also chase monsoon like millions of farmers across the country. So, the monsoon outlook, the monsoon performance is going to be the important factor in determining the RBI policy in the next three months," he said. As per the Indian Meteorological Department (IMD) prediction, the monsoon is expected to be normal this year.

"The Reserve Bank will keep a track of growth as it evolves, keep track of inflation as it evolves and keep track of aspirations and inspirations as it evolves," he said.

He defended RBI's tighter monetary policy decisions under him, saying the steps had succeeded in reining inflationary pressures. "It's not fair to say that inflation has not come down. In fact, headline inflation has come down from double digit to under five per cent," he said.

Subbarao however admitted the growth had moderate. "We have to make some sacrifices for managing inflation. But the sacrifice will be only for short term. In the medium term, low inflation and steady economy is a necessity for sustainable growth," he explained.

Pointing out that high inflation would hurt poor people more than higher income groups, he maintained RBI would also take into consideration the silent voices of large majority of poor people while taking decisions on inflation. Amid rupee crossing the 57 mark against US dollar, the RBI Governor said the apex bank would target any exchange rate but would intervene in the forex markets only to curb volatility and prevent disruption of macroeconomic stability.

"In India, the RBI does not target any exchange rate. We intervene in the foreign exchange market only to manage the volatility and to manage the disruption to the macro economic situation," he explained.

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