Lingering inflationary pressures potentially harmful: Deepak Mohanty

The persistence of high inflation rate, even if triggered by supply shortfalls, is potentially harmful and necessitates appropriate monetary policy responses to bring it back to its trend rate, said Deepak Mohanty, executive director of the Reserve Bank of India.

Increase in money supply unaccompanied by a commensurate increase in non-agricultural GDP is potentially inflationary, he said while addressing a seminar on `Perspectives on Inflation in India' at the Bankers Club, Chennai.

While the Indian economy has shown remarkable stability in the inflation rate since the mid-1990s, it is now important to persevere with appropriate policy responses so that the current trend of high inflation rate does not get entrenched, he said. 

Supply shocks accompanied by demand pressures such as high fiscal deficit and high money supply growth further accentuated inflationary pressures, he said.

For a developing country like India, he said, medium-term supply response to the changes in demand conditions is important for the determination of the trend inflation rate.

Discontinuation of the practice of automatic monetisation of fiscal deficit, a market-determined exchange rate system and greater reliance on price signals would help bring fiscal consolidation and vastly improve the underlying macroeconomic framework, he said.