September 25, 2012 / 5:53 PM / 6 years ago

Evolution of India reform a factor for policy-deputy central bank governor

NEW YORK (Reuters) - India’s persistent inflation and sub-par economic growth has the central bank caught in a monetary policy vise but conditions in the economy should not be considered static, the central bank’s Deputy Governor Subir Gokarn said on Tuesday.

The Reserve Bank of India left its main policy rate unchanged on September 17 at 8 percent, disappointing those who wanted a lower rate to spur growth and dovetail with a spate of unexpected economic reforms unveiled by the government.

The 8 percent repo rate, its main lever for monetary policy, has been in place since April while economic growth has underwhelmed at 5.5 percent in the latest quarter, not much better than the first three months of the year, spurring questions of whether this is a “new normal” environment.

“I think the concept of new normal has to take into account structural conditions and to the extent there are very visible and effective responses to what is clearly becoming, for example an entrenched source of inflation, which is food,” Gokarn told reporters on the sidelines of the India Investment Forum.

Citing the fluid situation in India and authorities’ response to spiking inflation and fiscal deficits, Gokarn said the bank will look at how the government is addressing these economic stress points by the next policy meeting.

“It is the evolution of these responses that is really going to shape the growth and inflation trajectory so we have to be sensitive to that,” he said.

Gokarn expressed less concern about spiking fuel costs and the possible long-term inflationary effects of a rise in diesel fuel prices, mainly because of the weak global economy.

Global oil prices have in the last week fallen back from the recent 2-1/2 month run-up to $100 a barrel.

“That may be because the global economy itself is in a less comfortable growth position than it was perceived to be two years ago. So, there may be some impact of that lower growth expectations on how commodity prices are shaping up,” he said.

Editing by Andrea Ricci

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