This Article is From Mar 14, 2013

Inflation must fall to 4-6 per cent; Budget may help: RBI

Inflation must fall to 4-6 per cent; Budget may help: RBI

India's high inflation must come down to a 4 to 6 per cent range, Reserve Bank of India (RBI) governor Duvvuri Subbarao said on Wednesday, noting full implementation of this year's Budget will have a "softening impact" on price growth.

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

The RBI governor said in his speech that the apex bank estimates threshold level of inflation at 4-6 per cent and levels above that demanded monetary policy tightening.

The Reserve Bank holds a policy meeting next week and is widely expected by analysts to cut interest rates by 25 basis points to 7.50 per cent.

Wholesale prices in India likely stayed flat at 6.6 per cent in February compared to the year-ago period after falling to a multi-year low of 6.62 per cent in January 2013, according to an NDTV Profit poll.

Core inflation, which excludes volatile food and fuel prices, has been easing since September 2012 and may have remained in check at 4.1 - 4.2 per cent.

Mr Subbarao, arguably the world's most hawkish central banker, has repeatedly rebuffed government calls for lower interest rates to kick start 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, the RBI governor 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," he 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 per cent 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," Mr Subbarao said.

He said 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 added.

Copyright @ Thomson Reuters 2013