Interest rate cycle has peaked: RBI Deputy Governer Subir Gokarn

NEW DELHI: Reserve Bank deputy governor Subir Gokarn on Friday said the interest rate cycle has peaked but warned that the central bank "might change its stance" if inflationary risks increase. "But even while I can give that guidance, let me emphasise that it's a guidance not a commitment. It's based on a scenario materialising and there are many risks to that scenario materialising," Gokarn said at an event organised by industry lobby Assocham.

Acknowledging a slowdown in the economy, Gokarn reiterated the monetary policy review guideline of ending rate hikes as long as inflation risks remain subdued.

RBI has raised rates 13 times since March last year to curb inflation. Data released on Friday showed food inflation decreased marginally to 11.81% in the week to October 29, as against 12.21% in the previous week. Gokarn said there was an urgent need to control public expenditure to cool down the rate of price rise. "The absence of fiscal tightening puts extra burden on inflation management. The fiscal deficit levels need to be brought down to the pre-crisis level of 2.5%."

The central government has already said that meeting the fiscal deficit target of 4.6% of GDP will be difficult and is considering revising the target upwards in its upcoming mid-year review.

The deputy governor said since the monetary policy was incapable of affecting demand arising out of public expenditure, greater efforts were required from the government.

The RBI estimates the economy to grow between 7.5% and 7.6% in the last two quarters of 2011-12, bringing the overall growth rate to 7.5% for the entire fiscal. Headline inflation is expected to come down to 7% by March 2012 and remain below that level next year.

On the persistent weakening of rupee, Gokarn said the Reserve Bank of India would not intervene in the market unless there was excessive volatility. The rupee has depreciated over 10% in the past six months, inviting calls from various quarters for intervention in the exchange rate market. "Although there has been some volatility in the exchange rate of late, the risk of intervention is that we could run out of essential reserves to meet external obligations," he said.