Need to bring inflation down to 5%: RBI

'To control inflation we need to keep interest rates high'

Written by Agencies | New York | Published: August 29, 2012 10:55 am

Reserve Bank of India Governor D Subbarao has said the battle against inflation has not ended yet and high prices were mostly hurting the poor people,who do not have a mechanism to get their voice heard.

The inflation continues to remain high and needs to be brought down to “more acceptable” levels of five per cent or less,Subbarao said,while noting that the challenge was to calibrate interest rates to control inflation and support economic growth at the same time.

They don’t have the mechanism to get their voice heard,” he said while delivering a lecture at Cornell University on ‘India in a Globalizing World: Some Policy Dilemmas’.

“I believe that the battle against inflation has not ended yet… We need to bring it down to more acceptable levels of 5 per cent or even less than 5 per cent,” he said.

Inflation as measured by the Wholesale Price Index stood at 6.87 per cent in July,down from 7.25 per cent in June. It is still much above RBI’s comfort level of 5-6 per cent.

Subbarao has maintained that inflation needs to remain the top priority for the Reserve Bank of India (RBI).

“To control inflation we need to keep interest rates high,but to support growth we need to keep interest rates low,” he said.

“The challenge is how do you calibrate interest rates,” he added.

The RBI had cut its main interest rate in April by 50 basis points to 8 per cent,but the central bank did not reduce the benchmark interest rates in its first quarter

credit policy review in July despite pressure from the industry,which wants reduction in interest rates to spur growth.

The Reserve Bank is scheduled to review its monetary policy on September 17.

India’s economic growth slipped to 9-year low of 6.5 per cent in 2011-12. Prime Minister’s economic advisory panel has pegged GDP growth for the current fiscal at 6.7 per cent.

Industrial production recorded a dismal growth of 2.4 per cent in May.

Subbarao said the central bank has been able to reduce price pressures by reducing the inflation rate to 7 per cent from 11 per cent.

He stated,”Some sacrifice to growth is an inevitable price” to pay in order to control price pressures.

Noting that India’s economic growth has fuelled inflation in the price of food,Subbarao said,”Structural inflation is a problem of India’s success story,specifically the growing income of the poorest sections.”

A synopsis of Subbarao’s address provided by Cornell University said there is a reversal of momentum in India’s growth,which stood at 9 per cent in the pre-economic crisis period of 2003-08.

Currently,the growth has decelerated,inflation is high and stubborn,the rupee has depreciated and investment has declined.

The note said this downturn has caused widespread anxiety that India has got derailed from the high growth trajectory and triggered a number of questions about whether the Indian growth story is faltering and when would India reach double

digit growth.

The Indian growth story is “still credible and the long term growth drivers are still intact. With appropriate policy and governance reforms,India can get back on track to rapid growth with low and stable inflation,” it added.

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