Reserve Bank of India Governor Duvvuri Subbarao tempers expectations of rate cut

MUMBAI: Reserve Bank of India Governor DuvvuriSubbarao on Tuesday tempered expectations of interest rate cuts beginning this month, saying prices of consumer products and manufactured items are still rising.

Subbarao, who has refused to give in to pressure from industry and the finance minister to lower key rates, said though the rate of price increase has slowed, it remains elevated.

" Inflation has come down, (but is) still high," he was quoted as saying by Bloomberg in his speech at the Indian Institute of Management, Lucknow.

The RBI governor said though India's economic growth rate may be headed towards a decade-low, there is not much room for either monetary or fiscal stimulus.

The fall in the Wholesale Price Index (WPI) to a three-year low in December had triggered hopes that Subbarao may finally relent and cut the repo rate in his quarterly monetary policy review on January 29.

But some economists warned against having high hopes. "RBI will act with caution," said Taimur Baig, economist at Deutsche Bank. "Inflation has been volatile in recent years, and the last thing the monetary authorities would like to do is cut aggressively, only to see prices jump. It is also natural to expect some hedge from a policymaking perspective."

Headline inflation, as measured by WPI, dropped to 7.18 per cent in December - the lowest since December 2009 - from 7.24 per cent in November. A closely watched sub-component - core inflation - fell to 4.2 per cent, signaling a softening in prices. Retail inflation, however, climbed back into double digits at 10.56 per cent in December.