RBI looking at ideal inflation rate of 3 pc: Reddy

NEW DELHI: With the price index slipping below four per cent, inflation has ceased to be a matter of concern for the Reserve Bank of India, which has now started looking at an ideal rate of 3 per cent in the medium term.
   
"We are not worried about inflation," RBI governor Y V Reddy said in an interview to the BBC yesterday, adding the central bank is looking at a medium term objective of 4-4.5 per cent and ideally toward three per cent.

Stating that inflationary expectations were quite benign now, he said, "We have to be concerned about the developments on the inflation front: that is our main responsibility."

Referring to the impact of recent interest rate cut by the US Federal Reserve, Reddy said it would be used as a "relevant input" into the ongoing analysis of economic and monetary developments.

RBI is slated to announce mid-term review of the annual credit and monetary policy on October 30. Some analysts expect the bank to relax the policy and cut interest rates after inflation fell to 3.32 per cent for the week ended September 8, the lowest level since December 2002.

Pointing out that India is essentially a domestic economy-dominated system, he said, "Our major considerations relate to domestic developments. But naturally, since we'are increasingly getting integrated with the rest of the world, increasing weight is given to global developments, in particular developments in the United States."

Replying to questions on the impact of slowdown in the US economy, he said, "We are not likely to be significantly affected by any unwinding of these imbalances. So overall, therefore, I will say..., there will be some impact, but the impact is likely to be less than most other emerging market economies".

Referring to the main challenge before the policy makers, Reddy said: "I think the biggest challenge is how we are going to handle the agriculture sector."

Pointing out that country has a daunting task to deal with poverty, he said, "60 per cent of the population is dependent on agriculture, and if agriculture is growing badly at 2.5 per cent or something like that, that means definitely the prosperity is eluding them".
   
The other challenge, which is a consequence of poor farm growth, he said, was to handle the problem of unemployment.
   
Taking note of the problems in the agriculture sector, the government had earlier called a meeting of the National Development Council, the highest policy making body in the country, to draw a plan to boost farm sector by bridging the yield gap -- the difference between possible and actual yield.

Elaborating on the impact of the decision of the US Federal Reserve to cut interest rates by 50 basis point, he said the linkages between the Indian economy and global financial market is increasing but as of today India is essentially domestic economy-dominated nation.

However, he added, as India increases its engagement with the world economy more weight would have to be given to global developments.

The developments in the global financial markets had their impact during July-end when the Indian stock market crashed, manifesting the increasing linkage between India and the rest of the world.

Without giving a direct answer to the possibility of reducing interest rates in future, especially in view of the lower inflation and Fed rate cut, Reddy said, "we recognize the underlying pressure, these have to kept in view."

Many Indian economists, while reacting to the Fed rate cut and increasing value of rupee which pierced Rs 40 a dollar mark last week, have suggested that the RBI should have a relook at its tight monetary stance and reduce the benchmark interest rates.

Unlike other economists and reports by various think tanks, Reddy tried to downplay the impact of slowdown of US economy on India by stating that country would not be hit as badly as other emerging economies. He, however, did point out that US slowdown will have "some impact" on India.

A recent report by the UK-based magazine 'The Economist', it may be mentioned, had pointed that the ongoing US subprime mortgage crisis was likely to depress Indian stock markets in addition to creating cash flow problems for companies.