Diesel, power hikes need to be reviewed from growth angle: RBI

Ahead of its monetary policy review, RBI today said recent increase in diesel prices and a possible hike in power tariff will impact inflation but the central bank will have to view it from growth angle and be a “little sensitive to various adjustments that might take place”.

“We have recognised the likely short-term impact of diesel price revision on inflation numbers. But we have to look at it in terms of (growth) trajectory and to the extent of helping to contain the fiscal deficit,” RBI Deputy Governor Subir Gokarn told reporters on the sidelines of a conference here.

“Let’s not forget that if you see a hike in diesel prices along with the hike in electricity prices, both of these will impact the (wholesale price) index,” he added. The wholesale price index based inflation rose to 7.55 percent in August as prices of potato, wheat and pulses as well as manufactured items soared. The retail inflation, based on consumer price index was at 10.03 percent in the same month.

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In the face of consistent demand for rate cut, RBI has been steadfastly maintaining that bringing down inflation is its priority. “… (if) more power becomes available from the grid, then people will use less diesel to generate power and the average cost of electricity might go down. So, that is going to have an impact on the overall inflation numbers as we go forward.

We have to be little sensitive to these various adjustments that might take place,” Gokarn said.

Last month, reacting to RBI’s decision to infuse Rs 17,000 crore into the financial system by way of a cut in CRR, Finance Minister P Chidambaram had said the response of RBI on October 30 would be far more supportive of growth.

The Reserve Bank is scheduled to come out with second quarter monetary policy review on October 30. In its mid-quarterly monetary policy review on September 17, RBI had lowered cash reserve ratio (CRR), the portion of deposits banks park with RBI, by 0.25 per cent to 4.5 percent.

Gokarn said the policy decision would be based on the impact of “growth risks” and “inflation risks”. “It will be a holistic perspective.“Gokarn also said RBI will take the recent developments and will have discussion with stakeholders before taking a decision.

“We will take everything that has happened over the last several weeks into account and will formulate decision. The process to reach that decision is just beginning.We will have the first such meeting on Friday, with the Indian Banks’ Association and from there on, we will consult a variety of stakeholders and will take a decision”, Gokarn said today.

Initiating a series of reforms last month, the government had increased diesel prices, after over a year, by Rs 5 per litre. Within days it allowed 51 percent FDI in multi-brand retail and 49 percent in aviation, which is expected to accelerate fund flows to the country.

Later, the Cabinet also cleared the Rs 1.9 lakh crore debt restructuring package for state electricity boards, a development that is expected to see a hike in electricity tariffs. To a query on the inflation, Gokarn said, the RBI would revise the projections during the forthcoming review meeting.

“In our last projection we have said it would remain above five (percent) till the end of the year. Certainly, we will revise those projections in our next review. I cannot really comment. That number is yet to be in front of us,” he said.

On RBI’s move to regulate banks lending loans against gold, Gokarn said, “I think what we have been focused on is that the risks in lending towards gold are controlled. That is the basis for our actions with respect to gold loan companies from some months ago. We are not here to discourage or encourage anything. But we are sure that it should not build up into a systemic risk”

PTI