RBI Governor D Subbarao on Monday 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 5 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
Mr Subbarao said there was need to bring inflation to 5 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 said.
He maintained that 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, Mr Subbarao said, “no, I believe not.”
“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 that India’s potential growth rate has come down. Last number we put out on potential growth rate is 7 per cent.”