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  3. Inflation needs to be reduced to 5% or lower: Subbarao

Inflation needs to be reduced to 5% or lower: Subbarao

29 Aug 2012 Evaluate

Pouring cold water on rate cut hopes yet again, Reserve Bank of India’s (RBI) Governor Duvvuri Subbarao has said that inflation remains too high and needs to fall further or risk more damage to the economy. India’s most aggressive central bank, which has been in eye of storm, for maintaining a status quo stance  in previous few monetary policy review, also added that cutting interest rates may support growth only in the short-term, while stubbornly high inflation will harm the economy in the longer term.

Apex Bank last pruned its main interest rate in April by a bigger-than-expected 50 basis points to 8 percent and since then has maintained a hold on key rates. However, Governor Duvvuri Subbarao, underscored that with this given hawkish stance, India’s central bank has been successful in lowering the inflation rate to 7 percent from 11 percent. But, further adding to anti-inflationary tone, stated that, “battle against inflation has not ended yet, as the rates needs to fall below 5%.  RBI’s governor also highlighted that various factors, including high commodity prices, the fiscal deficit and the monsoon, were adding to the upside risk of inflation.

India's main inflation gauge, wholesale price index (WPI), unexpectedly slipped at 6.87% for the month of July, its lowest since January 2010, as compared to 7.25% (Provisional) for the previous month and 9.36% during the corresponding month of the previous year.

India’s central bank, which so far preferred to battle out the inflation demon at the cost of sacrificing growth, which plunged to a decade low of 5.3% in March quarter, remains to hold this view, as the governor accepted that “some sacrifice to growth is an inevitable price” to pay in order to reduce price pressures. Meanwhile, a number of economists expect gross domestic product growth to be around 5.5 percent for the current fiscal year in India, Asia’s third-largest economy. Central Statistics Office will announce the Q1 June 2012 India GDP data on Friday 31 August 2012.

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