‘We are pursuing policies that will together raise growth and bring down inflation’

Reserve Bank of India Governor D Subbarao refused to cut interest rates in the second quarter monetary policy, belying expectations of the government. In an interview to P Vaidyanathan Iyer and George Mathew, Subbarao denied there was a disconnect between the two and talked of the shared goals of boosting growth and bringing down inflation.

Excerpts:

Why didn't you cut rates?

Balancing growth and inflation has been a difficult challenge. There are two variables that determine the market rate of interest. One is the policy rate and the other is liquidity considerations. A rate cut by itself may not help if liquidity is tight. Looking at the current inflation numbers, we thought we must maintain the rate where it is. There are liquidity constraints — both because of structural and fictional factors. Our assessment has been that these constraints will persist in the next a few months. So our endeavour was to ensure that any liquidity tightness should not take rates higher than they would be and the liquidity should be comfortable that the transmission from policy rate to base rate and then to lending rate. We want the liquidity to be in deficit... deficit to be small enough so that there's no inhibition to transmission.

Is there a disconnect between the RBI and the government?

I don't think so. Both the RBI and the government have shared goals — to raise growth and restrain inflation. We have our responsibilities cut out. I believe we are pursuing policies that will together raise the growth rate and bring down inflation numbers.

The government says it "will walk alone". Is it right to say that the shared views are not necessarily matching?

I can't interpret the finance minister's statement for you. I can only say that for the government and the RBI, there's no disconnect.

... contd.

ALSO READ

PM: Govt initiating more measures to attract investments

Cautious RBI cuts repo by 25 bps, says little space for more easing

‘Govt mulling stronger laws to block Ponzi schemes’

Unilever plans to spend up to $5.4 bn to ramp up stake in HUL