“The persistence of inflationary pressures even as growth has moderated, remains a key challenge,” RBI governor D Subbarao said as he unveiled the second quarter monetary policy review and lowered the CRR by 25 basis points.
Managing inflation will be the RBI’s key focus due to the continued “stickiness” in core inflation, he added.
CRR is the portion of deposits banks have to park with the central bank and after Tuesday’s cut, it comes down to 4.25 per cent. The repo rate, the rate at which the RBI lends to banks, remains 8 per cent. The RBI also raised its March-end inflation estimate to 7.5 per cent from the 7 per cent projected earlier and warned that inflation would rise somewhat in the October-December quarter, before easing in the January-March period.
Chidambaram, who had announced an ambitious five-year fiscal consolidation plan on Monday to signal the government’s commitment to fiscal reforms, was visibly disappointed. “Growth is as much a challenge as inflation. If government has to walk alone to face the challenge of growth, then we will walk alone,” he said.
Chidambaram has announced a series of reforms since returning as finance minister in August, hoping to revive growth by cutting expenditure on subsidies and attracting investors. All along, he has stressed the need for monetary and fiscal policies to work in tandem.
“Government is doing its best to send the clear message that we are on the path of fiscal consolidation. It is my hope that everyone will read and understand the government’s commitment to the path of fiscal consolidation,” the finance minister added.
The RBI’s conservative stance disappointed the markets too. The Bombay Stock Exchange Sensex fell by 205 points to a five-week low to close at 18,430.85. Bond yields also dropped to a three-month low although the rupee gained 10 paise to end the day at 53.98 against the US dollar.
With factory output not showing much of a turnaround, the Prime Minister’s Economic Advisory Council chairman C Rangarajan has scaled down his earlier GDP forecast of 6.7 per cent to 6 per cent for 2012-13. The RBI also lowered its growth estimate to 5.8 per cent for the period.
While acknowledging the finance minister’s fiscal consolidation plan, Subbarao said that the roadmap along with other recent policy initiatives of the government may open up space for monetary policy to restrain inflation and support growth in the future.
“I have not read the last few paragraphs of the statement but if it holds out hope for the future, I look forward to that future,” Chidambaram retorted in response.