No threat of stagflation: Subbarao

Reserve Bank of India (RBI) Governor D Subbarao today allayed fears of stagflation in the economy and asserted that the central bank is sensitive to growth concerns but not at the cost of higher inflation. Maintaining that it is comfortable with five per cent inflation, he said, RBI takes into account the growth-inflation balance and that is why there has been easing of interest rate since January last year.

Admitting that the high current account deficit (CAD) level is a matter of concern, he said there was need to boost exports and bring down dead-weight imports like gold Subbarao said there was need to bring inflation to five per cent saying the relationship between growth and inflation is non-linear.

"There is a threshold level of inflation. If inflation is above that level, it is inimical to growth. If inflation is below that level it is possible that you can bargain for higher growth, tolerating a little higher inflation," he told PTI. He maintained RBI's mandate is not just to target inflation like the Bank of England which does it at any cost. Asked about fears of stagflation, stagnation in growth coupled with high inflation, because of factors including RBI's tight money policy, Subbarao said, "no, I believe not."

He added, "See stagflation is prolonged low growth and high inflation. But if we look at the numbers, we look at the trajectory of growth and inflation, you will find that our inflation has come down. Out growth has also come down because of crisis and because of the post-crisis developments. We believe India's potential growth rate has come down. Last number we put out on potential growth rate is seven per cent." The average annual WPI inflation for 2012-13 was 7.34 per cent. Subbarao said at all times, the RBI took into account growth-inflation balance. "We indeed started easing our monetary policy stance from January, 2012 when we started easing policy rates, reduced repo rate and reduced cash reserve ratio," he said. Asked about how much of the current level of CAD was a concern to RBI, the governor said it was concern for a number of reasons, including the fact that the country can run a large CAD one year but it cannot do it year after year.

"From the RBI's perspective, CAD is a concern because it has implications for the exchange rate and thereby for inflation," he said. Listing steps that can be done to deal with the problem of high CAD, he said, while exports have to go up, what can be done quickly is to deal with the import side issues.

"If for example, petroleum sector prices are market- determined or close to market-determined, subsidies are reduced then demand will adjust. That can help. Government has raised the Customs duty on gold import. RBI has come out with some regulations to restrain the import of gold. But we need to increase exports in a big way and reduce dead-weight import like gold," he said. To a question whether there would be more steps to check gold imports, the governor said in the meeting of the Financial Stability and Development Council (FSDC) this morning there was a discussion on the issue and concern was shared over increasing gold imports in April and May. "CAD is a matter of concern and this is something which we will take into account in our monetary policy decision," he added.

Asked if he lost sleep over targeting inflation, while those in the government lost sleep over lower growth, Subbarao said, "Well, I wouldn't say that we are targeting inflation. "We are not an inflation targeting central bank. But when inflation is at double digit level, we believe we must bring it down."

The governor said there was a need to bring down inflation rate to "stable steady level" in order to secure medium term growth targets. He emphasised that inflation above five per cent is inimical to growth. "We were concerned that inflation has not eased. But now over the last six months, we have seen easing of inflation. So that itself is evidence of the hypothesis that we are not in stagflation situation," he said.