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RBI blames inflation for high interest rates

November 15, 2013 17:30 IST

RBI blames inflation for high interest rates

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The RBI on Friday attributed high interest regime to inflation and said banks in such a scenario would not be able to pass on lower rates even if the policy rate is brought down.

"Even if we reduce the policy rate, the banks would not, as they would not be able to mobilise money from depositors at a particular price," RBI Deputy Governor K C Chakrabarty told MCC Chamber of Commerce and Industry.

He said the RBI cannot force banks to lend at a lower rate unless they get funds at lower cost.

Since taking over at RBI on September 4, Governor Raghuram Rajan has twice hiked the repo rate -- at which the central bank lends to banks -- to 7.75 per cent, seeking to tame inflation.

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Image: A hawker arranges mangoes at a roadside shop in Chennai.
Photographs: Babu/Reuters

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The rate went up by 25 basis points each on September 20 and October 29.

Chakrabarty said: "Whatever may be the reason for the inflation, people will not deposit their money at a rate below the inflation figure.

“Then how will banks mobilise cheap funds or pass it. Even at the current rate, bank deposits growth is not exceeding 12 per cent."

The Consumer Price Index inflation, measured by movement in the retail prices of food items, soared to a seven-month high of 10.09 per cent in October. WPI-based inflation, too, shot up to 8-month high of 7 per cent in the same month.

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Image: A hawker sells straw hats in Kolkata.
Photographs: Reuters

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Chakrabarty said since the past 4-5 years the single agenda of RBI was to contain inflation and interest rates will have to be at an elevated level if prices are high and stubborn. "Inflation has to be controlled by monetary policy," he said.

The deputy governor said despite the country striving to contain the inflation and high rate regime, the central bank hoped that it could go back to 9-10 per cent growth levels.

"We have the potential for 9-10 per cent (growth trajectory) and we can grow at this rate . . . Growth is sacrificed because of high inflation," Chakrabarty said.

He said every stakeholder in the economy may have to sacrifice a little to bring back high growth.         

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Image: A hawker sells national flags on the eve of Independence Day in New Delhi.
Photographs: Kamal Kishore/Reuters

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Gross domestic product growth had slowed to 5 per cent in FY'13.

The situation was, however, improving with exports up and the pressure of CAD easing, Chakrabarty said and hoped for an improvement in the pace of economic growth post elections.

He asked the industry to focus on efficiency.     

"You (industry) are only talking about interest which is 7-8 per cent of total cost. But you are not speaking about the remaining cost areas."

On rising project costs, Chakrabarty said since the last 4-5 years industry is not bringing in any equity.

"Nobody speaks about equity. Do you want to run the industry only on debt?" the RBI deputy governor asked.


Image: Sanjoy Panja, a street hawker, sells umbrellas in Kolkata.
Photographs: Reuters

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