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RBI Defends Policy Action to Check Inflation
Wednesday, 28 September 2011, 19:14 IST
Bangalore: Amid criticism that frequent interest rate hikes are hurting economic expansion, RBI Governor D Subbarao said policy tightening was necessary to contain inflation and preserve medium-term growth prospects.
"At this high level, inflation is unambiguously inimical to growth; it saps investor confidence and erodes medium-term growth prospects. The RBI's monetary tightening is accordingly geared towards safeguarding medium-term growth even if it means some sacrifice in near term growth," he said while speaking at the New York University.
The central bank's decision to increase interest rate for the 12th time since March 2010 to check high inflation has evoked sharp reaction from industry. Even Chief Economic Adviser Kaushik Basu recently said that RBI should do some "out of box" thinking to deal with elevated inflation level in the country.
Despite the short-term borrowing (repo) rate going up by 3.5 percent since March 2010, inflation has remained stubbornly high at near 10 percent, much above the Reserve Bank's comfort level of 4-5 percent.
However, the tight monetary policy is affecting the economy. The data shows that GDP growth during the April-June quarter of 2011-12 moderated to a 18-month low of 7.7 percent from 8.8 percent in the corresponding period a year ago.
Industrial output growth during July was at 3.3 percent, the lowest in 21 months.
On the impact of monetary policy on growth, Subbarao said, "a much more nuanced evaluation of our policy stance is necessary. Evidence from empirical research suggests that the relationship between growth and inflation is non-linear... high inflation actually starts taking toll on growth."
While pointing out that RBI's anti-inflationary stance was being criticised as hawkish by some and soft by others, Subbarao said, "both the critiques cannot obviously be right at the same time."
Given the nature of inflation drivers, which includes rising wages in rural areas, he said that the monetary policy stance has been "aimed at restraining demand and anchoring inflation expectations."
Defending the "baby step" approach to deal with inflation, the RBI chief said it was necessary "to allow time for the banks and the private sector to adjust to a higher interest rate environment."
He further said, "our baby step approach during 2010 was a delicate balancing act between supporting recovery at home amidst growing global uncertainty and containing inflation pressures."
Baby steps refer to the calibrated approach followed by the RBI to combat inflation; it then hiked interest rates by 0.25 percent at a time.
Source: PTI
Source: PTI