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Growth-inflation balance is not that straightforward: Subbarao

Staff Reporter
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No timeframe for rollback of liquidity-tightening measures, says the RBI chief

D. Subbarao, Governor, RBI, delivering the R. Venkataraman Endowment Lecture on `Dilemmas in Central Banking', organised by the Madras School of Economics, in Chennai on Thursday. —photo: Bijoy Ghosh
D. Subbarao, Governor, RBI, delivering the R. Venkataraman Endowment Lecture on `Dilemmas in Central Banking', organised by the Madras School of Economics, in Chennai on Thursday. —photo: Bijoy Ghosh

RBI Governor D Subbarao, on Thursday, defended the central bank’s position on prioritising inflation over growth, saying that when the “inflation threshold limit is crossed, it becomes difficult to make a trade-off.”

“I get asked why must we first try to lower inflation and then strive to achieve growth. Or, why we cannot tolerate higher inflation in order to get higher growth. The trade-off is not as straightforward as that,” Dr. Subbarao said, while delivering the R. Venkataraman Endowment Lecture at the Madras School of Economics here on Thursday.

“There is a threshold level of inflation. If the inflation is below that level, then you can make that trade-off. But if it isn’t, then you can’t,” he added.

The central bank chief also asserted that the fight against inflation had not failed, defending the RBI against various criticisms claiming otherwise.

“If you look at it, inflation at the WPI level has indeed come down. What has not, however, is retail inflation, which is still in the double-digits. Retail inflation hurts poor people, of which there are hundreds of millions, the most. It hurts them more than it hurts the rich... a fact that we should not forget,” he said.

No voice

“It is also this poor section of the population that does not have a voice… whether through the media or otherwise. It is, therefore, all the more important that we contain inflation to help them,” he added.

Responding to what the Governor termed “general criticisms levelled at the central bank”, Dr. Subbarao also emphasised that inflation could not be tamed without some sacrifice on the growth front.

“Some sacrifice in growth is inevitable when you are trying to contain inflation. What is important to remember, however, is that this sacrifice in growth is only for the short-term. In the long-term, curbing inflation will be supportive of growth,” he said.

Liquidity-tightening measures

Talking about the central bank’s recent cash-tightening measures, Dr. Subbarao said that it would “not be advisable to give a time-frame on when the roll-back of the measures would happen.”

Last month, the RBI further lowered the limit for borrowing by banks under the daily liquidity adjustment facility (LAF) and increased their cash reserve ratio requirements.

“While it [the measures] may cause pain in the short-term, it is not advisable for us to give a timeline on when it will be removed. I would not even like to use the word ‘temporary’ as it may be misunderstood,” he said.

“However, what we can say is that the measures will stay until volatility in the foreign exchange market is curbed,” he added.

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