Inflation control gets precedence over growth

RBI Governor hopes to navigate the Indian economy to a soft landing

The Reserve Bank of India today said that in the growth versus inflation trade-off,monetary action will be aimed primarily at reining in prices even if it meant that growth will take a hit in the short-term. Surprisingly,the central bank does not share the same optimism as the government on either the trajectory of inflation or the growth estimates. It estimates wholesale price index-based inflation to remain high at the March levels of 9 per cent for the first six months of this fiscal,and to gradually decrease over the second half to touch 6 per cent by March 2012.

High and persistent inflation undermines growth by creating uncertainty for investors,and driving up inflation expectations, RBI Governor D Subbarao said in his monetary policy statement. An environment of price stability is a pre-condition for sustaining growth in the medium term. Reining in inflation should therefore take precedence even if there are some short-term costs by way of lower growth.

The RBI is hopeful that it would check inflation by restraining demand and help the Indian economy navigate a soft landing.

For the current financial year 2011-12,the RBI has estimated the gross domestic product GDP to grow at 8 per cent,a fully 1 percentage point lower than the finance ministrys and the Prime Ministers Economic Advisory Councils forecast of 9 per cent.

While PMEAC chairman C Rangarajan said the council would revise its estimates to between 8 per cent and 8.5 per cent after the RBI policy,chief economic advisor in the finance ministry Kaushik Basu said the ministry would stick to its target of 9 per cent. The central bank said that high oil and other commodity prices and the impact of its anti-inflationary monetary stance would moderate growth. Our baseline projection of real GDP growth for 2011-12 for policy purposes is around 8 per cent, Subbarao said. The inflation outlook will be shaped by the revision of fuel products prices,global crude oil prices,revision of wages,the behaviour of monsoon and rising prices of industrial raw materials such as minerals,fibres,rubber coal and crude oil.

He highlighted that the risks to growth included sovereign debt problem in the euro area,high commodity,especially oil prices,possible abrupt rise in long-term interest rates in advanced economies and accentuation of inflationary pressures on the emerging economies. Further,he said,the achievement of the fiscal targets set out in the budget could be challenged by the higher subsidy burden stemming from higher international crude oil prices.

In a press conference later in the afternoon,Subbarao said that the known unknowns have increased. For example,crude,food prices,etc. The risks to inflation are on the upside, he said. Last year,in April 2010,the RBI supported recovery and hence a baby steps approach of 25 basis point hike in policy rates was necessary.