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High inflation definitely responsible for slow economic growth: Chakrabarty

22 Nov 2012 Evaluate

The Reserve Bank of India (RBI) Deputy Governor K C Chakrabarty on Nov 21 maintained that while high interest rate was not alone responsible for the economic slowdown, high inflation was ‘definitely’ one of the reasons for the slow economic growth. Further, he also reiterated that inflation would have to ease further for interest rates to be eased.

The remarks assume significance in the backdrop of the widening overhang between the Finance Ministry and the RBI over the issue of reducing lending rates. Highlighting that lower core inflation was essential for tackling trade deficit, he said ‘trade deficit, can be tackled only if core inflation is brought down to 1 per cent.’ Core inflation is currently running at 5 per cent. However, he further underscored that slowdown in the growth is for a variety of reasons. To that extent monetary policy is not able to control the inflation and not effective, hence it is responsible.

India’s WPI inflation rate in October eased to 7.45 percent in October 2012 (over October, 2011) as compared to 7.81 percent (Provisional) for the previous month and 9.87 percent during the corresponding month of the previous year. Meanwhile, poor showing by the manufacturing sector pulled down the GDP growth to 5.5 percent in the first quarter, the decade's worst Q1 performance, prompting the government to press for quick decisions to boost investments.

Separately, urging banks should not to shy away from giving loans to productive sectors, Chakrabarty reiterated that ‘on account of NPA fear, banks should not stop lending but must improve their credit management capability for which there is enough room’, he said, adding, banks need to pay more attention to the credit needs of agriculture, SME and retail.

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