RBI says rate pause not a full stop

MUMBAI Fri Jan 7, 2011 8:47pm IST

Reserve Bank of India's Governor Duvvuri Subbarao speaks during a meeting with bankers in Mumbai April 21, 2009. REUTERS/Punit Paranjpe/Files

Reserve Bank of India's Governor Duvvuri Subbarao speaks during a meeting with bankers in Mumbai April 21, 2009.

Credit: Reuters/Punit Paranjpe/Files

Related Topics

MUMBAI (Reuters) - Reserve Bank of India (RBI) governor Duvvuri Subbarao said on Friday a pause in its tightening cycle should be interpreted as a comma and not a full stop, indicating further monetary policy tightening going ahead.

Subbarao told a conference in New Delhi the central bank was aiming to improve transparency and would not surprise markets with unexpected actions.

"While we have not surrendered our flexibility to take policy action as and when warranted, more frequent scheduling of policy reviews reduces the need for off-cycle action and thereby minimises the surprise element," Subbarao said.

RBI is due to review its monetary policy on Jan. 25 and is widely expected to raise rates by at least 25 basis points, after pausing in December, on the back of a surge in inflationary pressure.

"Inside the Reserve Bank, the view was that within the policy trajectory, it did not matter if we paused briefly as long as we remained committed to the eventual outcome.

"The dilemma then boiled down to communicating to the market that our action should be interpreted only as a comma and not a full stop," he told a conference on the Dilemmas in Central Bank Communication held in the capital city.

The Reserve Bank of India has been the most aggressive major central bank in Asia, lifting interest rates six times last year to fight surging prices being spurred by rising food costs in an economy growing at nearly 9 percent.

A recent surge in food price inflation has triggered analysts and dealers to expect the central bank to expedite its policy tightening cycle.

The RBI has said last month it expects WPI inflation to ease to 5.5 percent in the current fiscal year to end-March, but also said inflationary risks are to the upside.

India's food inflation rose for the fifth straight week to the highest in more than a year, reinforcing fears it has spilt over to broader prices and cementing expectations of a January interest rate hike.

Subbarao also said there was a dilemma in the market between normal and neutral rates.

"It is, however, not possible to precisely define the neutral rate for a rapidly growing and structurally transforming economy like that of India. On the other hand, 'normal' rates can be broadly inferred from the crest and trough of the policy rates over the growth-inflation cycle."

(Editing by Malini Menon)

FILED UNDER:
Photo

After wave of QE, onus shifts to leaders to boost economy

DAVOS, Switzerland - Central banks have done their best to rescue the world economy by printing money and politicians must now act fast to enact structural reforms and pro-investment policies to boost growth, central bankers said on Saturday.

OBAMA'S VISIT

Reuters Showcase

Coal Mining

Coal Mining

India to open coal to commercial mining firms soon, minister says  Full Article 

RBI Loan Rules

RBI Loan Rules

RBI relaxes overseas loan recast rules   Full Article 

E-commerce Firms

E-commerce Firms

Amazon, e-commerce rivals fuel commercial property boom in India  Full Article 

Growth Forecasts

Growth Forecasts

Indian economic growth forecasts pegged back, despite rate cuts: Reuters Poll.  Full Article 

Uber is Back

Uber is Back

Uber back in Delhi; govt says must await approval.  Full Article 

Markets at Record

Markets at Record

Sensex rises to record after ECB stimulus programme.  Full Article 

Pharma Sector

Pharma Sector

Ipca Labs hit by FDA ban on plant for standard violations.  Full Article | Related Story 

Forex Reserves

Forex Reserves

India FX reserves at record high as RBI fortifies defences  Full Article 

QE for Euro Zone

QE for Euro Zone

ECB launches 1 trillion euro rescue plan to revive euro economy.  Full Article 

Reuters India Mobile

Reuters India Mobile

Get the latest news on the go. Visit Reuters India on your mobile device  Full Coverage