While moderate inflation is essential for economic expansion, some short-term sacrifice in growth is inevitable for the sake of bringing stability on the price front, according to RBI Governor D Subbarao.
"We need to bring inflation down to secure sustainable growth in the medium term. Some short-term sacrifice of growth is an inevitable cost to pay for price stability in a supply constrained economy," Subbarao said while speaking at the National Convention on Leadership at the CII-Suresh Neotia Centre of Excellence for Leadership in Kolkata last month.
The edited transcript of the RBI Governor's speech was released by the central bank on its official website today.
"We have to manage the balance between price stability and growth. In order to combat inflation, RBI has had to gradually and continuously tighten monetary policy," he said.
"This has led to criticism, especially from industry and business sections, that higher interest rates engendered by our policy have curtailed growth. This grievance is legitimate, and to some extent, understandable," he added.
However, he said the central banks will also have to be sensitive to the 'voices of the poor' about the burden of surging prices.
"The voices of the poor do not of course have the same opportunity of collective articulation and we therefore have to make the extra effort to listen to this 'silent constituency'. In any case, as historical evidence demonstrates, there is really no trade off between price stability and growth in the medium term," Subbarao said.
The RBI has been following a tight monetary policy for the past two years to tame inflation, raising key rates 13 times since March, 2010. India Inc has blamed rising interest rates for fresh investments getting hindered and for the slump in industrial growth.
Economic growth during the second quarter (July-September) stood at 6.9%, the lowest in over two years. Industrial production contracted by 5.1% in October.
However, food inflation entered the negative zone in late December and experts have said this will help bring down headline inflation to below 7% by March-end.
Headline inflation has been near double digits since December, 2010.
Speaking about the current challenges before the central bank, Subbarao listed financial stability, infrastructure financing and financial inclusion among the priorities.
