WSJ: RBI's Gokarn: High Inflation Can't Be New Normal

ECONOMY|APRIL 5, 2011, 5:12 A.M. ET
RBI's Gokarn: High Inflation Can't Be New Normal

By SOURAV MISHRA, BIJOU GEORGE and SUBHADIP SIRCAR

MUMBAI—India cannot risk accepting high inflation as the "new normal," nor can the central bank be a bystander, a deputy governor of the Reserve Bank of India said Tuesday.

"In turn this [high inflation] is likely to weaken incentive for investment, which will threaten the sustainability of growth. This is a vicious circle of high inflation, low investment and slowing growth," Subir Gokarn said in a speech at an industry body meeting.

Some economists argue that high inflation was an inevitable fallout of rapid economic growth.

"The issue is not so much one of higher inflation for faster growth in the present. It is about the risk that higher inflation now poses for faster growth in the future. In other words, sustainability of growth over the long term requires controlling inflation," Mr. Gokarn said.

The deputy governor's comments pushed bond markets off the day's highs, triggered early in the session by the introduction of a new 10-year benchmark bond.

The most traded 8.13% 2022 fell to an intraday low of 100.39 rupees. In recent trade it was changing hands at 100.54 rupees.

Mr. Gokarn said both monetary and fiscal policies have a role to play in tackling the current phase of high inflation, which started out as high food prices, but has now become more generalized.

Non-food manufactured products inflation, an indicator of demand-side pressures, rose sharply from 4.8% in January to 6.1% in February and continues to stay well above its medium-term trend.

The central bank has raised interest rates eight times over the last one year, increasing the reverse repo rate by 2.25 percentage points and the repo rate by 1.75 percentage points.

It is next scheduled to meet on May 3 and is widely expected to hike rates by a quarter percentage point each.

"We cannot afford to be standing by while inflationary forces are gaining momentum," Mr. Gokarn said.

India's economy is estimated to have expanded by 8.6% in the last fiscal year that ended March 31. Finance Minister Pranab Mukherjee in his February budget speech said he expects the economy to grow 9% in the current financial year.

Write to Bijou George at bijou.george@dowjones.com and Subhadip Sircar at subhadip.sircar@dowjones.com

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From http://online.wsj.com/