Inflation must fall to 4-6 pct; Budget 2013 may help: RBI

India’s stubbornly high inflation must come down to a 4 to 6 percent range, Reserve Bank of India (RBI) chief Duvvuri Subbarao said on Wednesday, noting full implementation of this year’s budget will have a “softening impact” on price growth.

“The Reserve Bank has to ensure that inflation is brought down to the threshold level and is maintained there,” Subbarao told students in London.

His speech made available in advance to media, said that the RBI estimates threshold level of inflation at 4-6 percent and levels above that demanded monetary policy tightening.

The RBI holds a policy meeting next week and is widely expected by analysts to cut interest rates by 25 basis points to 7.50 percent.

India’s headline wholesale price index inflation had been above 7 percent from 2009 until January, when it fell to 6.62 percent from a year earlier. It is expected to have eased further to 6.54 percent in February, a Reuters poll showed.

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Subbarao, arguably the world’s most hawkish central banker, has repeatedly rebuffed government calls for lower interest rates to kickstart growth which is at a decade-low, calling on the government to do its bit via fiscal consolidation.

He said last week that India did not have the fiscal capacity to continue welfare programmes at current levels.

In reply to a question, Subbarao described the recent 2013-2014 budget as “a positive” given its timing ahead of elections next year and India’s huge macroeconomic challenges.

“The finance minister delivered a very responsible budget. You can quibble about how that is being achieved… but given the circumstances, I think it’s (the budget) very measured and responsible,” Subbarao said.

“If he delivers on that, from an RBI perspective, there’ll be some softening impact on inflation,” he added.

Finance Minister P Chidambaram unveiled a 16 percent surge in spending in the 2013-2014 budget, ahead of 2014 elections but imposed taxes on the rich and large firms to fill the revenue gap and cut the deficit. But most analysts consider his revenue assumptions too optimistic.

“(India’s) long-term growth drivers are intact but I also want to say the india growth story is not inevitable. If we don’t do the right things we will squander an historic opportunity,” the RBI governor said.

Stepping away from the published speech, Subbarao said that speaking from the perspective of emerging markets, currency wars benefited no one while many developing economies suffered from an erosion of competitiveness.

“We all understand it is a zero sum game. Everyone can’t devalue at the same time and benefit, everyone loses,” he said.

Reuters