Subbarao defends hawkish stance


Reserve Bank of India Governor D Subbarao on Tuesday strongly defended his monetary policy actions especially the 12 hikes in repo rate since March 2010 to tackle soaring inflation saying, "given the nature of the inflation drivers and their combined impact, clearly there is a significant role for monetary policy in combating inflation."

"The inflation that we have experienced over the last nearly twenty months is a result of a combination of supply shocks that had a trend impact on prices as well as demand pressures. Our monetary policy stance is guided by this understanding, and is aimed at restraining demand and anchoring inflation expectations," he said while delivering a speech at the Stern School of Business, New York University on Monday. "The argument of our critics that monetary policy has no role because inflation is a result of imported commodity prices would have been valid if the increase in commodity prices was a pure and transient supply shock or if there were no demand pressures. That clearly was not the case in India," he told the "doves" who criticised his policy actions as "hawkish".

On monetary tightening hurting growth, Subbarao said, "Another argument made in this line of criticism is that monetary policy tightening is hurting growth. I believe a much more nuanced evaluation of our policy stance is necessary. Evidence from empirical research suggests that the relationship between growth and inflation is non-linear. At low inflation and stable inflation expectations, there is a trade-off between growth and inflation. But above a certain threshold level of inflation, this relationship reverses, the trade-off disappears, and high inflation actually starts taking a toll on growth."

Subbarao said estimates by the Reserve Bank using different methodologies put the threshold level of inflation in the range of 4-6 per cent.

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