Managing growth vs inflation biggest challenge: RBI

Terming management of tension between demands of growth and of inflation as a major challenge after the global financial crisis, the Reserve Bank of India (RBI) today said though India recovered early, it was hit by inflation before others.

"In the aftermath of the crisis, our biggest challenge has been to manage the tension between the demands of growth and of inflation," RBI Governor D Subbarao said at the 24th convocation of Sambalpur University here.

"Even though we have recovered from the crisis ahead of most other countries, inflation too has caught up with us sooner than elsewhere," he said.

Economic growth requires maintaining a low interest rate regime whereas inflation management warrants raising interest rates.

"In managing this tension, we are deeply conscious that inflation is a regressive tax that hurts the poor the most as their earnings are not protected against rising prices," the RBI governor said.

As part of managing growth-inflation dynamics in the post-crisis period, the apex bank has raised policy interest rates seven times since March 2010, he said, adding the apex bank was are also sensitive to the need for supporting growth, a necessary condition for poverty reduction.

The challenge of making monetary policy has become even more complex in the context of globalisation, he said.

"How other countries, especially, systemically important advanced economies, manage their monetary policies has implications for us and we need to take that into account in determining our own policy stance," Subbarao said.

On financial inclusion programme that seeks to provide banking access to poor and those living in the villages and remote parts of the country, the RBI chief said banks had been advised to draw up board approved Financial Inclusion Plans for a period of three years upto March 2013.

Subbarao said this should be integrated with the business plan of the bank.

A uniform model has not been imposed so that each bank can build its strategy in line with its business model and comparative advantage, he said.

In order to further financial literacy, the RBI has established centres focused on financial education at its regional offices in Chandigarh, Pune and Bangalore. "We hope to replicate this in other cities too," he said.

The RBI has also encouraged commercial banks to set up financial literacy and credit counselling centres to help people develop better financial planning skills and to learn of the opportunities available in the financial sector, Subbarao said.

"Most importantly, we are encouraging both central and state governments to include financial literacy in school and college curriculum so that the next generation enters the adult world financially literate," he said.