RBI discounts deflation, sticks to policy stance

The Reserve Bank of India does not consider any prospect of deflation in India and does not envisage any change in its policy stance even as the annual rate of inflation turned negative, falling to (-)1.61 per cent for the week ended 6 June 2009.  (See: Inflation rate enters negative zone at -1.61 per cent) 

"India does not suffer from any demand constraints, therefore there is no concern of deflation," RBI governor Duvvuri Subbarao said.

On the contrary, he said, it is important to ensure food prices stay at reasonable rates in a country like India.

The country, he said, does not suffer from demand constraints. It is rather the high prices that deter spending and consumption.

Subbarao said while the RBI and the government recognises the need for economic stimulus, reversing monetary expansion is part of fiscal management and that there was no schedule for this.

The problem with the stimulus plan was that it did not to work through fully and had effect on only parts of the economy like steel, cement, two-wheelers, cars, cargo and freight traffic.

The immediate priority for the RBI, he said, was restoring the economy to a high growth path and making sure exports recover.

India does suffer from demand constraints, he said, adding, but that is due to high prices.

The Reserve Bank will, however, continue to monitor price trends in the coming months as well before arriving at a policy decision, Subbarao said.

There is a fear that both business and the government may use the negative inflation as a means to press RBI and the commercial banks to lower interest rates.

The RBI uses various parameters to monitor inflation and data shows that prices of food and primary articles in India are still high, Subbarao said.

While government data shows WPI-based inflation rate at a three-decade low of -1.61 per cent, the RBI governor said prices of food and crude oil prices are still high.