Price stability essential for sustained economic growth: Subbarao

New Delhi: Committing to anchor inflationary expectations, Reserve Bank of India (RBI) on Friday said price stability was essential to help investors and consumers make informed choices and contribute to growth.

“Key to our collective national aspiration for sustained high economic growth is low and steady inflation,” RBI Governor D Subbarao said while addressing a meeting of bankers’ club.

[caption id=“attachment_654165” align=“alignleft” width=“380”] RBI is slated to announce next mid-quarter monetary policy review on March 19. Reuters[/caption]

He further said that only under an environment of price stability investors and consumers could make informed choices and contribute to growth.

The responsibility of RBI is to anchor inflation expectations and ensure price stability, he said, adding “neither theory nor empirical evidence presents a credible case for acquiescing in a new normal for inflation in India”.

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Moreover, he added, “there is no empirical evidence to establish that the benefits of higher growth outweigh the costs of welfare loss associated with higher inflation.”

Observing that government does not have the fiscal capacity to continue welfare programmes at existing level, he said, “fiscal responsibility will act as a self-limiting check on the wage-price spiral”.

Finance Minister P Chidambaram proposes to bring down the fiscal deficit to 4.8 percent of the GDP in 2013-14 from 5.2 percent estimated in the current fiscal.

RBI, which had been maintaining tight monetary policy stance in view of high inflation, had last month lowered the key interest rate by 0.25 percent. There is pressure on the RBI to further reduce interest rate to arrest decline in growth.

RBI is slated to announce next mid-quarter monetary policy review on March 19.

Subbarao in his speech also underlined the need for convergence of domestic inflation with the global rate with a view to promoting sustainable growth.

“We need to manage this convergence by calibrating the ‘inflation differential’ over time rather than acquiescing in a new normal for inflation”, he said.

Admitting that average inflation rate in India over the last three years has trended up, Subbarao said, “nevertheless, the context presents neither a necessary nor a sufficient

condition for the Reserve Bank to revise its inflation goal.

“Not a necessary condition because, as indicated earlier, much of our inflation is driven by supply constraints which can be corrected by appropriate policies and their effective implementation”, he added.

PTI