Plan to pull down inflation to 5.5% over the yr: YV Reddy

In its Credit Policy, the RBI has hiked the CRR by 25 bps to 8.25%. It has left the repo, reverse repo rates unchanged.
The response of markets to policy changes have been divergent, the RBI Governor, YV Reddy said. The global growth is slowing down significantly, he said, adding that the inflation is a concern. He sees a conflict between price stability and financial stability. The global slowdown may not lower aggregate food demand, he added. The pass-through of high fuel prices is still incomplete, he said, speaking to the news media. He expects to bring down inflation to 5.5% over the year.
Excerpts from the press conference:
"What we tried to do last time on January 29, I took lot of your time to explain the reasons for the thoughtful in action because we just didn’t act.
When we explained, I explained two things that there is a continuing inflationary pressure and that there are lot of uncertainties and when there are so many global uncertainties, it is not appropriate to take a particular position and get yourself locked in that position and therefore it's better to watch and see what happens.
So we watched and we did take action during the interim as required considering the liquidity conditions. The question is what is the situation now?
The situation now is that there is greater inflationary pressure than what we expected. As far as growth is concerned, moderation is more or less on expected lines, global uncertainties have however increased and infact there is a constellation of adverse factors. We knew that there was global liquidity, we knew that the financial markets were in trouble, we knew that there was problem in fuel, we knew that there are problems related to food, but all of them have happened at the same time and all these factors happening together have resulted in an extraordinary degree of uncertainty.
Also global growth is definitely slowing down and it is significant. The global inflationary pressures have intensified and more importantly, the policies are responding to the immediate problems of financial markets in advanced countries and some of these measures taken in the interest of financial stability at the shorter end, may exactly operate against their important mandate of price stability.
In a way you have a conflict between price stability and financial stability. Although the policy proceeded in the assumption that is usually within inflation and growth and we have maintained price stability and financial stability is supposed to the sub-zoomed in the overall stability. But for the first time, almost globally there is a very clear dilemma or a conflict between choosing the short-term financial stability and the medium-term inflation. The sub-zoomed issue again is when there is a growth slowdown in the major economy. So these are unprecedented dilemmas for policy. Further when the policy measures have been taken, the response of the markets has not been as anticipated, there was a bit of a diversion between the policy objectives and to some extent policy outcome compared to what it was expected.
So we have this extraordinary global situation and domestically everything is going on track, financial stability is maintained, financial markets are alright, financial institutions are doing reasonably well. The only pressure point relates to inflation. Therefore naturally our major focus now in terms of the policy is inflation and therefore that gets the highest priority in terms of the policy.
If I quickly see the change between January stance and this stance, in January the stance was to reinforce the emphasis on price stability. Now we have made it very clear that it accords high priority to price stability. Then we also said well anchored inflationary expectation. Why are we saying these two different things? Either way is because the price stability is depending on the way the price was moved whereas inflation expectations are partly on the action that we take.

So sometimes you have to demonstrate your determination to act on inflation to convince people and for that your expectations should be reasonable. So in a way these are two interrelated and this comes to the important focus at critical junctures of policy as we have now.

Second aspect is somewhat common that we have to respond swiftly to the ongoing developments. In terms of the type of dilemma we face for taking decisions at a global level, it is agreed that there is a global slowdown. If there is a global slowdown what will be the impact on the commodity markets, that really matters.

Food and fuel maybe slightly not entirely linked, because if you look at food, a large demand for food is coming from India and China and that demand is likely to be inelastic because both the economies are growing. So if both the economies are going, there are lot of people to eat more and their food habits are going to be also more intensive in terms of proteins etc."