subir gokarn : interview with business standard interview with dr subir gokarn, deputy governor of the reserve bank of india, conducted by the business standard, mumbai, 1 february 2010. * * * friday ’ s was the first monetary policy that reserve bank of india deputy governor subir gokarn has been involved with directly, and the experience has been rewarding. “ the rigour of the process was a revelation, ” one of the youngest deputy governors that the central bank has had says. in his first interview to a newspaper after taking charge two months earlier, gokarn, 50, explains the rationale for the measures. edited excerpts : the rbi governor compared himself with abhimanyu in the mahabharata. how difficult is the situation? the context for that is that it was very easy to do what was done in october 2008 onwards. once the severity of the crisis was recognised, a lot of actions were taken in a very short period of time which completely changed the balance of the policy stance. obviously, there is a need to correct it now and to take it to normalcy. so, when you start moving towards that, even if it is a correct thing to do, it can be potentially disruptive. returning from the situation, the sequence, and pacing the activity is going to be critical. going forward, that ’ s really the challenge. rbi expects the government to do quite a few things. the policy statement also makes a lot of assumptions. what happens if these are not met? the commitment made in the last budget was that the fiscal deficit as a percentage of gdp will be 5. 5 per cent in 2010 – 11. there is no basis for us to assume that it will be anything different. so, our estimate of the funding requirement in order to support the government borrowing programme, as well as the growing demand for credit from the private sector, has been factored into our decision while increasing the cash reserve ratio by 75 basis points. the policies we make today are because of what we believe the macroeconomic environment will be over the next few months. so, we have to assume certain things on growth, inflation, liquidity, fiscal deficit, market borrowings and capital inflows. in that assessment, we have to allow, and have indeed done so, for some cushion if some of these assumptions go wrong. capital flows are a worry. have you factored in the possibility of intervening in the market and using instruments to

. e., the basic forces of demand and supply. from this perspective, the simple question “ why are food prices rising so persistently ” gets a simple answer “ because demand persistently exceeds supply ”. the next simple question “ how do we bring food inflation down? ” again gets the simple answer “ by increasing supply as quickly as possible ”. in the context of the title of my address, let me emphasize the point that the food inflation per se is not a new phenomenon for india. on slide 1, beginning in the early 1950s, we can see a relatively large number of episodes in which food prices spiked. in some of these episodes, the spikes were significantly sharper than in others and many of them, particularly during the more recent decades, were relatively short - lived. of course, the most vivid ones were the two that followed closely in the late 1960s and the early 1970s. we have apparently had nothing comparable since then in terms of the peak rates of inflation. in the most recent episode, however, the pattern is somewhat different ; there is a clear indication of a prolonged upward trend beginning sometime in 2003 and showing persistence, albeit with a brief interruption. this is, of course, very noisy data. we have tried to systematize it to be able to draw some more substantial inferences. in slide 2, specific episodes during the six decades have been identified on the criterion that the average food inflation rate during each episode was 10 per cent or higher. the slide displays the average and peak rates during these episodes. the episodes during the late 1960s and early 1970s clearly stand out, while the more recent episodes are relatively more moderate in terms of both average and peak rates. however, the most recent episode does suggest something of a hardening. but, this is as far as magnitudes go. a more worrying attribute of food inflation is persistence. slide 3 displays an extremely significant pattern, which is really the foundation for the title of this lecture. we had two episodes of high persistence in the early 1970s and the late1970searly 1980s, during which food inflation was on the average above the 10 per cent mark for 35 months and 32 months, respectively. since then, as the graph clearly indicates, episodes were relatively short - lived, with the longest one lasting 27 months in the early 1990s. even in the severe drought conditions of 1987, the high food inflation episode lasted only 18 months. but, strikingly, the most recent one, which runs from september 2008 until