RBI says monetary tools can do little to tame inflation

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Reserve Bank of India (RBI) finally admitted that inflation was now going beyond its control and there was little it could do about it with monetary tools.

Speaking at a conference on Climate Change impact on Wednesday, RBI deputy governor Subir Gokarn said, “Continuing high energy prices have reduced the space that monetary policy has in terms of responding to inflation.”

Gokarn’s comments have come close on heels of governor D Subbarao indicating at Stern School of Economics that containing inflation to less than 6 per cent remained its primary objective. Subbarao said, “With WPI inflation ruling above 9 per cent, we are way past the threshold. At this high level, inflation is unambiguously inimical to growth; it saps investor confidence and erodes medium term growth prospects. RBI’s monetary tightening is accordingly geared towards safeguarding medium term growth even if it means some sacrifice in near term growth.”

But Gokarn’s fear of inflation persistence stemmed from the fact that energy prices remained at over $100 dollars a barrel. Besides, Gokarn pointed out that energy, particularly fossil fuel energy consumption has been on the ascent in the country. Energy consumption per person in 1995 was just 1295 units. Quoting data for 2010, he said, consumption averaged 4647 units. He said, “life style changes have led to increased demand for energy and economic structures leading to inflation.”

He also said that there were also other worrying impacts of climate change on inflation. He said that agriculture yields in the country was no longer rising since rainfall was reducing. Quoting 50-year data from the Met department, Gokarn said there was a sharp reduction in rainfall particularly during July and August months. Rainfall in this period was critical for farm out put and if this pattern continued, he said there could be a loss of 15 per cent and 10 per cent in rice and wheat yields by 2020.

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