-Reuters
economy to global supermarket chains will help growth and control
inflation, RBI governor Duvvuri Subbarao said on Friday.
"It’s commendable that government has taken the initiative. Let’s hope
that it will improve the logistics chain and supply chain management in
agriculture," Subbarao said in a speech in Chandigarh.
Late Thursday, the government approved 51 percent foreign direct
investment in the supermarket sector, paving the entry of firms such as
Wal-Mart, Tesco and Carrefour into one of the world’s largest untapped
markets.
"It’s important for not only raising overall growth but also important
for containing inflation and improving quality of life over 50 percent
of population," Subbarao said.
Opening up the retail sector to global players has been a much awaited
reform but has been long hobbled by political differences. The
Congress-led government’s biggest ally Trinamool Congress is opposed to
the move.
The RBI chief said that inflation needs to be brought down to 5 percent
initially and then even lower, consistent with India’s integration with
global economy.
Subbarao said the current inflation situation is a consequence of both supply shocks and demand pressures.
Monetary tightening needs to be supplemented by supply side measures to raise potential economic output, he said.
"Raising agricultural production and productivity is, important for
containing price pressures, raising rural incomes and making growth more
inclusive," Subbarao said.
India’s inflation, which is largely driven by high food and global
commodity prices, plus expansive fiscal policies, is the highest among
major economies in Asia. It’s wholesale prices rose more than expected
in October as the cost of food and fuel increased.
The high inflation print, above 9 percent for the 11th month, was
further evidence of the Reserve Bank of India’s (RBI) inability to
achieve a breakthrough in its fight against inflation despite 13 rate
rises since March 2010.
In its Oct. 25 mid-quarter review of monetary policy, the RBI had said
that a rate hike may not be warranted if inflationary pressures start to
ease by December.
Slowing growth, stubbornly high inflation, rising interest rates,
political gridlock, gloom in the West and a sliding rupee have conspired
to dampen investor and corporate sentiment in Asia’s third-largest
economy.
The RBI has lowered the country’s growth forecast to 7.6 percent for the
current fiscal year ending in March from 8 percent previously.
Subbarao says a reduction of federal and state fiscal deficits are important steps for a stable macro environment.
India’s fiscal deficit during April to September was 2.92 trillion
rupees, or 70.8 percent of the full-year target, government data showed.
Most expect it to breach the 4.6 percent of GDP target for the fiscal
year.
The government said it would sell debt worth 2.2 trillion rupees,
sharply above the budgeted 1.67 trillion rupees in the October to March
period.
Subbarao said that India being a emerging economy with a partly open
capital account, floating exchange rate and a monetary policy that takes
into account global developments, has to continue to manage the
"impossible trinity."
The impossible trinity refers to the economichypothesis that a country
simultaneously cannot have a fixed exchange rate, an open capital
account and an independent monetary policy.
Rupee volatility to remain
Subbarao said the volatility in the foreign exchange market will remain until the euro zone crisis is resolved.
"Until there is a credible solution to the sovereign debt problem in
Europe, we will see movements in the exchange rate," Subbarao said.
He added that the central bank is watching the rupee, but could not say whether it will intervene in the forex market directly.
The rupee has skidded nearly 17 percent from a 2011 high reached in late
July as risk-averse investors flee emerging markets, increasing the
difficulties for a government already struggling with high inflation,
slowing economic growth and a widening trade gap.
The rupee touched an all-time low of 52.73 on Tuesday and state-run
banks were spotted selling dollars in the market in recent sessions,
sparking talk of RBI intervention.
On Wednesday, RBI deputy governor Subir Gokarn said intervention has been aimed at smoothing sharp movements in the rupee.