A day after the Reserve Bank of India kept interest rates unchanged in its mid-quarter monetary policy review,RBI Governor D Subbarao on Tuesday defended the central banks decision and said that the inflation is still high and above tolerance level and some sacrifice in growth is an unavoidable price to pay.
If left unchecked,persistent inflation,no matter what the drivers,could unhinge inflation expectations. And eventually inflation gets generalised as indeed has happened. It was not just supply shocks. There were demand pressures too consumption,especially rural consumption had gone up as a result of increase of real rural wages, Subbarao said at a conference here.
Core inflation is higher than the recent long period average of 4 per cent. CPI (new index) inflation at 10.4 per cent (for May 2012) is high and still on the uptrend. Contrary to popular perception,the RBI studies all inflation indicators at disaggregated level to assess the inflation dynamics, he said.
On allegations that the RBIs monetary tightening is stiffening growth,the RBI Governor said,Some sacrifice in growth is an unavoidable price to pay (need to restrain demand). The growth sacrifice is only in the short-term. In the medium term,inflation is inimical to growth. Low inflation is an essential precondition for securing medium term growth. High inflation makes investment decisions uncertain. The pro-growth voice is vociferous. But poor people are hit by inflation. Inflation is a regressive tax … hurts the poor the most. Their voice,silent as it is,must also be heard.
While inflation has come off from peak levels,reduction in inflation is proportionately smaller than the slowdown in growth. Has potential growth rate declined? If economy is growing faster than its potential,there will be inflationary pressures, he said.
What explains the current moderation in growth? According to Subbarao,private consumption which has been holding growth has moderated. Investment growth has decelerated… net exports remained the fastest growing sub-sector and moderation in wholesale inflation,particularly at the core level,has not transmitted to the retail level. He said growth can be accelerated by raising consumption,investment and exports. Discounting fears that the country is heading to a 1991-like condition,he said the 1991 crisis was triggered by BoP pressures,which in turn were a consequence of fiscal profligacy of the 1980s.