At its last policy meeting in September, the RBI left a section of India Inc. and markets disappointed with its decision to not cut the Bank Rate despite reducing the Cash Reserve Ratio by 25 basis points. The industry’s hopes for a rate cut grew after the government reversed its no reforms stance by announcing a series of big bang reforms – from a hike in the price of diesel to foreign direct investment in multibrand retail and aviation.
However, the RBI did not change the Bank Rate keeping the high inflation rate, at 7.55 per cent in August 2012, in mind.
Speaking at the annual general meeting of the Southern India Chamber of Commerce & Industry, Mr Gokarn conceded that last month’s diesel price hike will add to near-term inflation, but added that the move will help rein in fiscal deficit.
The central bank will revise inflation projections in the October meet, Mr Gokarn said, adding that it becomes difficult to sustain a 6% or more inflation level.
The deputy governor reiterated that the central bank cannot lose sight of managing inflation and the bank will review how the domestic and global scenario will affect growth in its efforts to achieve a balance between growth and inflation. The RBI’s anti-inflation stance may affect growth in the short run, he added.
The government’s subsidy bill has to be addressed to tame fiscal deficit, Mr Gokarn said.
In its report on government finances submitted on Friday, the Vijay Kelkar Committee has said the subsidy on diesel should be phased out by the end of the 2013-14 fiscal year and on household cooking gas by 2014-15, and the government should aim to reduce the kerosene subsidy by one-third by 2014-15.
The panel has suggested that urea prices be raised to reduce the fertiliser subsidy bill estimated at $5.4 billion (Rs 28,299.20 crore). It has also pitched for a progressive reduction in food subsidies and set out the roadmap for bringing down spending on subsidies to 2 per cent of GDP in 2013-14 and 1.8 per cent in 2014-15.