Inflation too high, says RBI; defends tight money policy

Mumbai, June 19 (IANS) Reserve Bank of India Governor Duvvuri Subbarao Tuesday said inflation is still above the acceptable level and it cannot be brought down without monetary tightening and sacrificing some 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, defending the central bank's decision not to cut key lending rates.

After a mid-quarter policy review Monday, the RBI kept the repo and cash reserve ratio (CRR) rates unchanged, saying increased liquidity in the system would further spike inflation.

"we would like to believe that the policy rate hikes have helped in moderating inflation...we look at all indices, be it WPI, CPI, etc in policy making. Those wanting to gauge our responses should look at them...," Subbarao said at a function organised by the Indian Merchants' Chamber.

In May, the benchmark shole-sale price index moved up to 7.55 percent as compared to 7.23 percent in the previous month. Food inflation rose to 10.74 percent also in May as compared to 8.25 percent in the previous month.

"Consumer-price inflation is running above 10 percent. That is quite disturbing."

To tackle inflation, the central bank raised its key lending rate 13 times since March 2010 but began reversing the rate cycle by cutting the repo rate (short-term lending rates) by 50 basis points in April. And it was widely believed that it would ease rates for the sake of growth that has been slowing.

Subbarao said several factors like rupee depreciation and high fiscal deficit were impacting growth.

"Fiscal deficit is also driving inflation because government is spending, increasing wages," he said adding that the government must cut spending and not just raise taxes for fiscal consolidation.

He said large fiscal deficit, growing supply side constraints, persistent inflation and adverse external environment dampening domestic sentiments were also putting pressure on the potential of economic growth.

"Potential growth rate of the economy has come down."

The RBI Governor, however, discounted fears that the country is heading to a 1991-like balance of payment crisis situation. "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," he said, adding the onus of boosting growth was squarly on the government, the RBI and the industry.