Why slowdown? RBI at sea; will probe

Jul 17 2012, 20:38 IST
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Subbarao admits reason for slowdown has eluded RBI; says probe launched to find out. (Reuters) Subbarao admits reason for slowdown has eluded RBI; says probe launched to find out. (Reuters)
SummarySubbarao admits reason for slowdown has eluded RBI; says probe launched to find out.

Amid widespread demand for cut in interest rate in the forthcoming monetary review to boost growth, RBI today said the policy rate is not the only reason for slowdown in investments and the economy.

"The Reserve Bank maintains that interest cost is only one of the several factors that have dampened growth, and the increase in policy rate by the Reserve Bank alone cannot explain the investment slowdown," RBI Governor D Subbarao said at the sixth annual Statistics Day Conference here.

"I have asked our economic research department to do a detailed study on the time-series relationship between real interest rate and investment activity. We expect to put out that report in the public domain in the next couple of months," he added.

His comments come two weeks ahead of the quarterly monetary policy review which is due on July 31.

Subbarao's decision to keep interest rate unchanged at the policy review last month to contain inflation evoked criticism from industry and the government.

Ahead of the policy, industry has stepped up demand for interest rate cut to boost economic growth, which fell to nine-year low of 6.5 per cent for 2011-12.

The RBI Governor also raised issues concerning data gaps with regard to computation of inflation, national income and growth and underlined the need for rectifying them.

He also questioned the linkage between deceleration in industrial growth to 6.5 per cent in 2011-12 and the increase in policy rates by 3.75 per cent by RBI during March 2010 and October 2011. "... it is necessary to look behind the data and explore what lies underneath," he added.

On the current situation, the RBI Governor said, "The uncertainty surrounding economic activity has heightened in the post-crisis period. India is no exception."

He added that assessing India's potential growth rate, consistent with our objective of low and stable inflation, remains a challenge.

In its annual report for 2009-10, Subbarao said, the Reserve Bank had reported that the potential output of the Indian economy may have dropped from 8.5 per cent pre-crisis to 8.0 per cent post-crisis.

"Latest assessment following the standard filtering technique suggests that potential output growth may have further fallen to around 7.5 per cent," he said.

Meanwhile, for getting a clearer picture of the price rise trend, Subbarao proposed a producers price index saying that the present structure of measuring inflation does not capture the price movement of services.

The Producer Price Index (PPI) will be better able to measure

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