RBI hints at holding rates, says inflation top priority

MUMBAI: Ahead of the mid-quarter review of the monetary policy on Monday, senior-most Reserve Bank deputy governor K C Chakrabarty today said the top priority is to keep inflation under control.

"Controlling inflation is the top most priority of the central bank," Chakrabarty told students of a city college here on a day when the Wholesale Price Index data for August was released by the government.

After falling a bit in the previous month, inflation rose to 7.55 per cent in August, driven by higher prices of potatoes, wheat and pulses which rose due to poor monsoons.

The spike in August's WPI was also driven by a rise in the prices of manufactured items, further whittling down the efforts of the monetary authority to batten down inflation.

In July, the inflation was 6.87 per cent. However, in August last year the rate of price rise was 9.78 per cent.

Chakrabarty admitted that the nearly two-year-old rate hikes to combat inflation have had impact on growth, driven by slowing investments. "We agree that investment has slowed down due to higher interest rate."

On the third round of quantitative easing (QE3) announced by the US Fed yesterday, he said it will help the American economy, but it will spike commodity prices.

"What the US has done, will help the American economy. But it will have impact on the commodity prices. However, our problem is more internal," he said.

Yesterday, US Federal Reserves chairman Ben Bernake said the central bank will buy $ 40 billion worth government bonds every month to help boost the economy till 2015. He also left the interest rates unchanged at 0.25 per cent till then.

The move has jacked commodity prices across the globe, besides triggering a rally in stock markets.

Taking a dig at the banks for reducing interest rates on their deposits, Chakrabarty said savers must be given higher rates of interest in comparison to inflation.