New Delhi: Central banks must maintain low interest rates until consumer and company spending is robust enough to support economic growth, said Subir Gokarn, the Standard and Poor’s (S&P) economist in the running for the deputy governor’s post at the Reserve Bank of India (RBI).

Fighting recession: Standard and Poor’s economist Subir Gokarn. Madhu Kapparath / Mint

“The key transition is going to be in terms of private spending becoming more robust so policymakers can exit without completely disrupting the growth process,” Gokarn, Asia-Pacific chief economist at S&P, said in an interview on Tuesday in New Delhi. “There are signs that it is happening, but clearly not to the point of complete assurance.”

Gokarn’s comments came after officials from Group of 20 nations last week said they are cautious on the world growth outlook and agreed the need to coordinate when unwinding the emergency measures adopted to reverse the global recession. Weak growth accompanied by the risk of inflation is causing a complex dilemma for India’s central bank on setting rates, RBI governor D. Subbarao had said on 27 August.

RBI had on 28 July forecast the economy would grow 6% with an upward bias in the year to 31 March, the weakest pace since 2003. It also raised its inflation forecast to 5% from 4% by the end of the fiscal. The key wholesale price inflation index fell 0.21% in the week to 22 August from a year earlier.

Subbarao said RBI may have to reverse its easy monetary policy sooner than most other countries as inflationary pressures are mounting quickly, Dow Jones reported on the Financial Express website on Wednesday.

Gokarn and Cornell University economist Eswar Prasad are frontrunners for the post of deputy governor at India’s central bank, ‘The Economic Times’ had reported on 8 August without saying where it got the information. The new deputy governor will be in charge of monetary policy and will fill the vacancy created when Rakesh Mohan stepped down in June. Gokarn said he hadn’t been contacted regarding his candidature.

“The inflation story is a little more complicated than it appears,” Gokarn said. “I don’t see we are in danger of demand-side inflation picking up. Where it is coming from is supply side—oil, commodities and now in India’s case, food.”

He said whether central banks will respond to supply side inflation the way they did in 2008 is still a debate.

RBI raised the key repurchase rate by 3 percentage points to 9% between October 2005 and July 2008 as inflation soared to 12.91%, a 16-year high. Subbarao, who was appointed governor in September 2008, has since slashed RBI’s benchmark rate to 4.75% as the global recession deepened.