RBI can act any time to deal with pressure

Sambalpur (Orissa): Reserve Bank Governor D Subbarao on Thursday said it can change policy stance at any time to rein in inflation based on the macroeconomic situation.

"Notwithstanding (the) scheduled quarterly and mid- quarterly reviews, we reserve the right to alter our policy stance at any time to respond to the evolving macroeconomic situation," Subbarao said at the Convocation function of Sambalpur University.

The statement assumes significance in the light of double digit food inflation and rising crude oil prices.

Earlier during the day, Prime Minister Manmohan Singh said the overall inflation would come down to seven per cent by the end of March on the back of steps being taken by the government.

"Food inflation has also been a cause of concern. But recently, the situation has improved and I expect the situation to improve further," Singh said.

The food inflation had touched the year`s high of over 18 per cent in December last year before moderating to 11.49 per cent for the week ended February 12.

"I will be the first one to admit that inflation in the last 18 months has become a problem. There were reasons beyond our control.

First of all, there was the drought of 2009, there were natural calamities, which affected the production of important products such as vegetables and onions," the Prime Minister had said.

Even Subbarao said "we are deeply conscious that inflation is a regressive tax that hurts the poor the most as their earnings are not protected against rising prices."

He also admitted "the tension that we need to manage is that economic growth requires that we maintain a low interest rate regime whereas inflation management warrants that we raise interest rates."

As part of managing growth-inflation dynamics in the post-crisis period, the Reserve Bank has raised policy interest rates seven times since March 2010, he said.

At the same time, Subbarao said, "we are sensitive to the need for supporting growth as economic growth is a necessary condition for poverty reduction."

On capital inflows, Subbarao said, "the liquidity infusion policy of the US Fed, popularly known as quantitative easing (QE), has triggered larger capital flows to emerging market economies (EMEs)."

This has in turn put upward pressure on EME exchange rates eroding their export competitiveness and pushing up asset prices. EMEs had to adjust their macroeconomic policies to manage the implications of these flows, he said.