Odishatv Bureau
Mumbai: Ahead of the policy review next week, RBI Governor D Subbarao on Wednesday said inflation reading of above 6 per cent demands tightening of the monetary policy stance.

"Inflation above 6 per cent would justify, indeed demand, tightening of the monetary policy stance. It is this understanding that has informed our monetary policy stance," Subbarao said while delivering the fifth IG Patel memorial lecture at the London School of Economics.

"Monetary policy is inevitably the first line of defence to guard against inflation getting generalised through unhinged inflation expectations," the Governor said, adding he wants inflation to ideally be in the 4-6 per cent range.

The views come amidst continuing calls for a rate cut, which can help revive India's sagging GDP growth that hit a decadal low of 4.5 per cent in the third quarter of FY'13.

While headline inflation moderated to a four-year low of 6.62 per cent in January, the retail price index sniffed at 11 per cent in February.

All eyes are on February inflation readings scheduled for today. However, it is widely believed that RBI primarily focuses on the WPI numbers.

Most analysts are expecting the RBI to do a trade off with growth with at least a 25 bps cut in the short-term lending rate at the March 19 policy meet.

"The Reserve Bank has to ensure inflation is brought down to the threshold level and is maintained there," Subbarao said. He emphasised that high rates dent growth only in the short-term but in the medium-term, there is no such trade-off.

He, however, maintained the long-regaled 'India (growth) story' is still credible but "we need to do the right things" to get back on the high growth trajectory and called for "vigorous and purposeful structural and governance reforms" to achieve the same.

"The Government has to be at the centre of this and lead the process of economic revival. As the central bank and as the regulator of large segments of the financial sector, the Reserve Bank, too, has an important role to play in this," he said.

The RBI chief said: "Making this happen requires a supply response from the government by way of providing public goods and creating a conducive environment for private investment."

"We can accelerate growth and improve welfare only if we effectively implement wide-ranging economic and governance reforms. Slipping up on this will amount to a costly and potentially irreversible squandering away of opportunities."

The Governor drew attention on the external sector and the widening current account deficit, which is expected to touch a record high and breach the 5 per cent mark this fiscal, saying 2.5 per cent CAD is the sustainable level.

"A CAD above the sustainable level is a macroeconomic risk as it raises concerns about our ability to meet external payment obligations and erodes confidence of potential lenders and investors," he said, adding that CAD above 3 per cent had led to the 1991 balance of payment crisis.

Subbarao said that sufficient attention should be paid to the quality of deficit and ways of financing it.

"Should the risk of capital exit materialise, the exchange rate will become volatile causing knock-on macroeconomic disruptions."

Subbarao responded to the criticism of its decision to cut rates in the face of high CAD, saying it does not lead to import demand when GDP growth is slow and it is a response to a slowing of inflation, which can make exports competitive.

He emphasised the need to curb fiscal deficit, saying it has a bearing on inflation, and welcomed the "much delayed" steps taken by the Government over the last six months to curb the twin deficits (CAD and fiscal deficit).

"Notwithstanding political economy compulsions, credible fiscal adjustment along with a transparent, predictable roadmap is an imperative for growth."

The Government has brought down fiscal deficit to 5.2 per cent this fiscal and pegged it at 4.8 per cent of GDP for the next fiscal.

scrollToTop