'There is no new normal to inflation'
Putting an end to the ongoing debate on whether high inflation could be accepted as a “new normal”, Reserve Bank of India (RBI) Governor D Subbarao on Thursday said there was no new normal to inflation.
He said the current inflation of 9.4 per cent was way above the central bank’s comfort zone and the aim was to bring it to five per cent in the medium term.
“I believe there is no new normal to inflation. We can bring it down to five per cent in the medium term,” Subbarao said.
RBI has raised policy rates 11 times in the last 16 months to tackle inflation, which stayed stubbornly high. The central bank expects inflation to stay around nine per cent in the first half of the current financial year. RBI revised the projection for the year-end inflation to seven per cent from six per cent as projected.
In the first quarter review of monetary and credit policy, RBI maintained its anti-inflationary stance saying short-term growth could be sacrificed for long- and medium-term benefits.
“Yes, in the short term, we are sacrificing growth only to ensure sustainable growth in the medium term. Most of the time we have only one instrument which is the interest rate and with that instrument you want to achieve the two objectives of containing inflation and supporting investment,” Subbarao said.
He explained that with one instrument; the twin objectives of restraining consumption and supporting investment became a problem.
“That is the problem with one instrument you cannot at the same time restrain consumption and support investment. So, in the short term, you may have to sacrifice growth to generate an environment of rapid growth and steady inflation in the medium term,” he said.
Subbarao said there was a strong structural component in inflation and the government must act to remove supply-side bottlenecks. According to the latest data, food inflation was at 8.04 per cent as on the week ended July 23, higher than 7.33 per cent a week ago. Fuel inflation was unchanged at 12.12 per cent.