High inflation inimical to growth: Subbarao
27 Sep 2011
India's inflation rate of nine per cent is ''way past the threshold,'' and is undoubtedly ''inimical to growth,'' asserted D Subbarao, the governor of the Reserve Bank of India, while addressing a gathering at New York University's Stern School of Business on Tuesday.
Defending his monetary stance, Subbarao said there was need for a nuanced evaluation of the policy stance.
''Evidence from empirical research suggests that the relationship between growth and inflation is non-linear,'' said the RBI governor. ''At low inflation and stable inflation expectations, there is a trade-off between growth and inflation. But above a certain threshold level of inflation, this relationship reverses, the trade-off disappears, and high inflation actually starts taking a toll on growth.''
Estimates by the Reserve Bank using different methodologies put the threshold level of inflation in the range of four to six per cent. ''With WPI inflation ruling above nine per cent, we are way past the threshold,'' said Subbarao. ''At this high level, inflation is unambiguously inimical to growth; it saps investor confidence and erodes medium term growth prospects.''
The Reserve Bank's monetary tightening is geared towards safeguarding medium term growth even if it means some sacrifice in near term growth, he added.
Referring to the question of interface between monetary policy and fiscal policy, and whether monetary policy was once again becoming hostage to fiscal compulsions, Subbarao admitted that monetary policy was dominated by fiscal considerations during the 1970s and 1980s in India.
