Price stability essential for growth, says Subbarao

Committing to anchor inflationary expectations, and rejecting the notion that high inflation is the "new normal", the Reserve Bank of India (RBI) today said price stability was essential to help investors and consumers make informed choices and contribute to growth.

"Accepting a new normal for inflation not only has no theoretical or empirical support, but entails the moral hazard of policy inaction in dealing with supply constraints," RBI Governor D Subbarao said while addressing a meeting of bankers' club here.

"Key to our collective national aspiration for sustained high economic growth is low and steady inflation," he added. He further said only under an environment of price stability investors and consumers could make informed choices and contribute to growth.

The responsibility of RBI is to anchor inflation expectations and ensure price stability, he said, "There is no empirical evidence to establish that the benefits of higher growth outweigh the costs of welfare loss associated with higher inflation."

Observing that government does not have the fiscal capacity to continue welfare programmes at existing level, he said, "fiscal responsibility will act as a self-limiting check on the wage-price spiral".

Some economists have argued RBI should adjust its policies towards an acceptance of persistently higher inflation.

Finance Minister P Chidambaram proposes to bring down the fiscal deficit to 4.8 per cent of the GDP in 2013-14 from 5.2 per cent estimated in the current fiscal.

RBI, which had been maintaining tight monetary policy stance in view of high inflation, had last month lowered the key interest rate by 0.25 per cent. There is pressure on the RBI to further reduce interest rate to arrest decline in growth.

RBI is slated to announce next mid-quarter monetary policy review on March 19.

Subbarao in his speech also underlined the need for convergence of domestic inflation with the global rate with a view to promoting sustainable growth.

"We need to manage this convergence by calibrating the 'inflation differential' over time rather than acquiescing in a new normal for inflation", he said.

Admitting that average inflation rate in India over the last three years has trended up, Subbarao said, "nevertheless, the context presents neither a necessary nor a sufficient condition for the Reserve Bank to revise its inflation goal.

"Not a necessary condition because, as indicated earlier, much of our inflation is driven by supply constraints which can be corrected by appropriate policies and their effective implementation", he added.