RBI can act any time to deal with inflationary pressure

Sambalpur (Orissa), Feb 24 (PTI) Reserve Bank Governor DSubbarao today said it can change policy stance at any time torein in inflation based on the macroeconomic situation.

"Notwithstanding (the) scheduled quarterly and mid-quarterly reviews, we reserve the right to alter our policystance at any time to respond to the evolving macroeconomicsituation," Subbarao said said at the Convocation function ofSambalpur University.

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

Earlier during the day, Prime Minister Manmohan Singhsaid the overall inflation would come down to seven per centby the end of March on the back of steps being taken by thegovernment.

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

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

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

First of all, there was the drought of 2009, there werenatural calamities, which affected the production of importantproducts such as vegetables and onions," the Prime Ministerhad said.

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

He also admitted "the tension that we need to manageis that economic growth requires that we maintain a lowinterest rate regime whereas inflation management warrantsthat we raise interest rates."

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

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

On capital inflows, Subbarao said, "the liquidityinfusion policy of the US Fed, popularly known as quantitativeeasing (QE), has triggered larger capital flows to emergingmarket economies (EMEs)."

This has in turn put upward pressure on EME exchangerates eroding their export competitiveness and pushing upasset prices. EMEs had to adjust their macroeconomic policiesto manage the implications of these flows, he said.