Under attack for not reducing interest rates, Reserve Bank of India Governor D. Subbarao, on Tuesday, said inflation at current levels was unacceptable and monetary tightening was required to ensure sustainable growth.

“We want to support growth in the medium-term with low and stable inflation, which is possible only with tightening, but inflation at the current level is not acceptable,” he said at a function organised by the Indian Merchants’ Chamber here.

He went on to say that “we would like to believe that the policy rate hikes have helped in moderating inflation...we look at all indices, be it WPI or CPI, in policy-making. Those wanting to gauge our responses should look at them; don’t criticise us for confusing...”

On Monday, the RBI had stunned markets and industry by leaving all key rates and cash reserve requirements for banks unchanged despite widespread expectations of rate cut. Irked by the policy decision, Commerce and Industry Minister Anand Sharma had said he would take up the matter with the Finance Minister and the RBI Governor.

The wholesale price index-based inflation rose to 7.55 per cent in May, while GDP growth last fiscal plunged to a nine-year low of 6.5 percent.

Discounting fears that the country was heading to a 1991-like condition, when the government had to pawn the sovereign in offshore banks, the Governor said, “we are not at a 1991-like implosion situation in 2012 (and that) our growth story is still credible but not inevitable. We need to work hard.”

On the sharp fall in crude and other commodity prices, he said this had been undone by the sharper decline of the rupee.

The sharp depreciation of the rupee over the last few months was driven by a combination of global as well as domestic factors and the future exchange rate movement would depend on fixing these issues, Dr. Subbarao said.

While the high current account deficit and the higher trade deficit, driven by rising imports led by gold and oil, were the domestic factors, the ongoing eurozone crisis was one of the crucial international issues responsible for the rupee depreciation, he said.

“While the rupee depreciated in the August-December period of last year due to global factors, the depreciation from March till date was due to both global as well as domestic factors,” Dr. Subbarao said.

Drawing a comparison between the currencies in the BRIC bloc, he said the Brazilian real had witnessed the largest depreciation followed by the rupee during this period. Dr. Subbarao said that the growing current account deficit, the relative inelasticity of imports and high inflation had negatively impacted the rupee.

In 2011-12, while exports sniffed at $304 billion, imports crossed $486 billion, out of which $155.6 billion were crude and $66.1 billion were gold imports.

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