RBI will not allow overheating: Subbarao

Reserve Bank of India governor Duvvuri Subbarao said yesterday that the central bank will do everything possible to prevent overheating in the economy. "We are alert to the possibility of overheating (which is persistent high inflation due to supply shortages) and we will do everything possible to prevent that," Subbarao told analysts in a teleconference today.

"Our approach to preventing overheating is to act from the supply side," Subbarao added. 

Rising headline inflation numbers are typically one of the first signs of overheating in the economy. As a result, governments and central banks usually raise interest rates to curtail spending and borrowing.

Yesterday, the central bank moderately raised its key short-term rates as also the mandatory cash reserves that banks maintain with it by 25 basis points each to tame inflation.

Even though inflation drew closer to 10 per cent in March, analysts rule out an immediate danger of overheating as surging prices are not spread over and supply of food items are being augmented.

Deputy governor Subir Gokarn said the apex bank has three challenges this year--supporting growth, containing inflation and managing government borrowings without hurting the private sector needs.