Business News/ Politics / News/  Inflation threshold is 5%, says RBI governor

Mumbai: India’s inflation is above the threshold level and needs to be reined in as it will erode growth in the medium term, Reserve Bank of India (RBI) governor D. Subbarao said on Monday.

RBI governor D Subbarao.

While Subbarao cautioned that his speech should not be linked with the forthcoming monetary policy, his words assume significance as in the mid-quarter policy, RBI decided not to raise rates, citing inflation concerns.

He said the central bank had been criticized for raising policy rates 13 times without being able to contain inflation, but stifling growth. RBI cut the policy rate by 50 basis points in April to 8%. A basis point is one-hundredth of a percentage point.

Growth fell to 6.5% in the last fiscal from 8.4% in the previous year, and this was attributed to, among other things, high interest rates in the economy.

However, Subbarao argued that inflation was inimical to growth in the long term, and low and stable prices are an essential precondition for securing medium-term growth. “Only in a situation of price stability can consumers and investors make informed decisions," he said, adding that RBI’s monetary stance has been aimed at restraining demand and at managing inflation expectations.

“Admittedly, monetary tightening has resulted in some sacrifice of growth in the short term. That is an inevitable price to pay for price stability. But the growth sacrifice is only in the short term. In the medium term, there is no trade-off between growth and inflation," he said.

Subbarao, who has recently been critical about the government’s role in exercising fiscal prudence and addressing supply-side constraints to address inflation, said there was no conflict between the government and RBI, and that some level of disagreement was normal.

It has been speculated that the government may prefer to see RBI lowering interest rates as growth is slowing, but the latter wants a tight monetary policy to check inflation.

“Don’t nit-pick. Pick your battles. Fight those battles valiantly," Subbarao said about such disagreements, while quoting a passage from Patel’s book on the role of the governor.

Patel had written that a central bank governor, without offending the government, can start a debate and steer the argument in a certain direction.

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Updated: 16 Jul 2012, 10:48 PM IST
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