'Low inflation essential for steady, high growth'

The Reserve Bank of India (RBI) on Monday said growth in the short term may have to be sacrificed to tame rising prices. According to the central bank, steady growth requires lower inflation.

D Subbarao“You cannot get high growth by tolerating high inflation in the long run,” RBI Governor D Subbarao said, while speaking at an event held at the Indira Gandhi Institute for Development Research. He said RBI had to manage demand and inflation expectations, which may lead to sacrificing some growth in the short term.

Inflation, which remained above the central bank’s projections during 2010-11, stood at 8.66 per cent in April. The steep increase in fuel prices over the weekend is expected to add to inflationary pressures, according to economists.

Subbarao said April inflation of 8.66 per cent was high and RBI needed to manage the trade-off between growth and inflation to hasten growth. “The objective of the 12th Plan is faster, more inclusive and sustainable growth. From RBI’s perspective, the primary challenge is to manage faster growth with low inflation. We need low inflation for steady and high growth,” Subbarao said. RBI has pegged gross domestic product growth at 8 per cent for the current financial year — lower than the government’s projection of nine per cent. “Perhaps the threshold for inflation is five per cent,” Subbarao said.

Deputy Chairman of the Planning Commission, Montek Singh Ahluwalia, while speaking at the same event, said any reduction in inflation would happen gradually. “I think inflation remains an area of concern. Inflation results which we are seeing now, are probably the outcome of measures we had taken three-four months back. I think the effect of what has been recently done would be felt two-three months down the road. Overall, I expect inflation to soften in the next few months. It will, however, remain above 6 per cent for some more time,” Ahluwalia said. He added the Planning Commission’s comfort zone on inflation was somewhere between five-six per cent. “It is agreed inflation would remain above 6 per cent for some more time. However, there is no dispute in anybody’s mind that inflation above six per cent is in the danger zone,” Ahluwalia said.

Apart from demand-side pressures, RBI saw rising oil and food prices as key drivers of inflation.