Inflation still too high, says RBI governor

In spite of wholesale-based price inflation dipping to an eight month low of 7.45 per cent in October, Reserve Bank of India governor Duvvuri Subbarao said today that it was still too high, damping hopes that the central bank would cut its policy rates in its 18 December policy review.

Speaking on the sidelines of a banking summit in Pune, Subbarao said the RBI was on the alert to manage both growth and inflation.

Earlier, on Thursday, RBI deputy governor K C Chakrabarty aired of the same thoughts on inflation. He was of the opinion that the rate of inflation was still far from the RBI's comfort level.

This reiteration of the bank's stance on inflation virtually kills hopes of any policy rate cut before the fourth quarter (Jan-March).

The central bank had last slashed the repo rate (at which banks borrow from RBI) by 50 basis points to 8 per cent on 17 April. Between April and October, it cut cash reserve ratio (the portion of deposits banks are mandated to keep with RBI) by 50 bps to 4.25 per cent and the statutory liquidity ratio (portion of deposits banks invest in government securities) by 100 bps to 23 per cent, to pump in liquidity into the system.

A policy rate cut normally leads to availability of cheap money from the system. This in turn would add to higher rate of inflation. At the same time, lower interest rates will ensure growth of the economy by encouraging companies to expand.