RBI may change policy stance if inflation eases, says Gokarn

Jaipur: The Reserve Bank of India (RBI) will change its monetary policy stance only if inflation eases and further rate increases will depend on the price rise situation, Subir Gokarn, deputy governor at the central bank, said on Wednesday.

“It (further rate hike) depends on the inflation situation,” Subir Gokarn said while addressing students in Jaipur.

“We raise rates not because it is an end in itself. To the extent we see the problem persisting, then there is a basis to raise rates but if we see the problem is starting to ease off, then that would provide the basis for a change.”

India’s food and fuel inflation accelerated in mid September, indicating persistently high inflationary pressures in the economy.

Data for September, due around 12 noon on Friday, is likely to show the wholesale price index probably rose 9.70 percent a year earlier, easing slightly from 9.78 percent in August.

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However, inflation continues to stay at nearly twice that of the RBI’s comfort levels, raising the possibility of another rate increase by the Reserve Bank of India on 25 Oct, when it meets to review monetary policy.

Gokarn also said higher income levels were increasing the tolerance for higher inflation.

The benchmark 10-year bond yield rose following Gokarn’s comments on the policy stance, while weaker-than-expected factory output data, already factored in by the market, also lead to some selling.

Industrial output in August rose a lower-than expected 4.1 percent from a year earlier, government data showed.

The 10-year paper was trading at 8.73 percent, up 3 basis points from its previous close.

The inflation data would now be crucial for helping cement views regarding the policy stance.

Gokarn said robust domestic demand will help absorb the shock from the global slowdown.

Indian manufacturing growth nearly stalled in September, turning in its weakest showing since March 2009 on slowing output and order growth as a year-and-a-half of interest rate increases and weakening global conditions take a toll on Asia’s third-largest economy.

“Countries like China and India has large population and hence has robust demand which will help in absorbing the global shock.”

Reuters