RBI Governor D Subbarao today allayed fears of stagflation in the economy and asserted that the central bank is sensitive to growth concerns but not at the cost of higher inflation.
Maintaining that it is comfortable with 5 per cent inflation,he said,RBI takes into account the growth-inflation balance and that is why there has been easing of interest rate since January last year.
Admitting that the high current account deficit (CAD) level is a matter of concern,he said there was need to boost exports and bring down dead-weight imports like gold.
Subbarao said there was need to bring inflation to 5 per cent saying the relationship between growth and inflation is non-linear.
There is a threshold level of inflation. If inflation is above that level,it is inimical to growth. If inflation is below that level it is possible that you can bargain for higher growth,tolerating a little higher inflation, he said.
He maintained that RBIs mandate is not just to target inflation like the Bank of England which does it at any cost.
Asked about fears of stagflation stagnation in growth coupled with high inflation because of factors including RBIs tight money policy,Subbarao said,No,I believe not.
See stagflation is prolonged low growth and high inflation. But if we look at the numbers,we look at the trajectory of growth and inflation,you will find that our inflation has come down.
Out growth has also come down because of crisis and because of the post-crisis developments. We believe that Indias potential growth rate has come down. Last number we put out on potential growth rate is 7 per cent.
The average annual WPI inflation for 2012-13 was 7.34 per cent. Subbarao said at all times,the RBI took into account growth-inflation balance. We indeed started easing our monetary policy stance from January,2012,when we started easing policy rates,reduced repo rate and reduced cash reserve ratio,he said.
Asked about how much of the current level of CAD was a concern to RBI,the Governor said it was concern for a number of reasons including the fact that the country can run a large CAD one year but it cannot do it year after year.
From the RBIs perspective,CAD is a concern because it has implications for the exchange rate and thereby for inflation, he said.