The Reserve Bank of India has ruled out any revision in its inflation goal.
While admitting that the average inflation rate in India over the last three years ‘has tended up,’ RBI Governor D. Subbarao, however, asserted that “the context presents neither a necessary nor a sufficient condition” for the apex bank to revise its inflation goal.
The Governor made this assertion while addressing a meeting on Friday at Bankers’ Club in New Delhi on the subject “Is there a new normal for inflation?”
Mr. Subbarao said “much of our inflation is driven by supply constraints”. These could be corrected by appropriate policies and their effective implementation, he added. “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,” he pointed out.
Stating that there “is no empirical evidence to establish that the benefits of higher growth outweigh the cost of welfare loss associated with higher inflation,” the Governor felt that the context presented no sufficient condition for the RBI to revise its inflation goal.
“The responsibility of the RBI is to anchor inflation expectations, and ensure price stability,” he said. “Neither theory nor empirical evidence presents a credible case for acquiescing in a new normal for inflation in India,” he made it clear.
The RBI Governor admitted that central banks across the globe faced a complex policy choice in managing growth-inflation balance. He felt that the recent high growth in rural wages “cannot be sustained without corresponding productivity increases. He was of the view that the government did not have the fiscal capacity to continue entitlements and welfare programmes at the current level. Once the government embraced fiscal responsibility, “it will act as a self-limiting check on the wage-price spiral,” he pointed out.
The new normal argument based entirely on domestic considerations, he said, would create permanent wedge between domestic and global inflation. This would mean a persistent real appreciation of currency, he added. “To support sustainable growth during the period when the economy is globalising, our inflation rate needs to converge with global one,” he said.
