Inflation must be brought down to 4-6%: Subbarao

ENS Economic Bureau , ENS Economic Bureau : Mumbai, Thu Mar 14 2013, 00:40 hrs

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Reserve Bank of India Governor D Subbarao on Wednesday indicated that "inflation above 6 per cent would demand tightening of the monetary policy stance" and "it is this understanding that informed the Reserve Bank's monetary policy stance".

"Estimates by the RBI using different methodologies put the threshold level of inflation in the range of 4 to 6 per cent. The RBI has to ensure that inflation is brought down to the threshold level and is maintained there," Subbarao said while delivering 5th IG Patel Memorial Lecture at the London School of Economics.

According to Subbarao, in order to contain inflation, monetary policy seeks to curb demand which, in turn, restrains growth. "As per this logic, reduction in growth is an inevitable outcome of tight monetary policy. But this sacrifice is only in the short-term. In the medium term, there is no growth-inflation trade off; on the contrary, low and stable inflation secures sustained high medium term growth. And this is what the RBI is aiming at."

He said the relationship between growth and inflation is non-linear. "At low levels of inflation... some inflation can be tolerated to grease the wheels of growth. But above a certain threshold level of inflation, this relationship reverses..."

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