A day after the Reserve Bank of India (RBI) left interest rates unchanged, defying widespread demand for a rate cut, governor D Subbarao said on Tuesday that taming inflation was vital for long-term growth.
“High inflation is inimical to growth,” said Subbarao. “We are trying to bring down inflation actually not to stifle growth but to sustain and secure growth for the medium-term.”
In its mid-quarter review of the monetary policy released on Monday, the RBI kept the repo rate, the rate at which it lends to banks, unchanged at 8% and also maintained the cash reserve ratio (CRR) or the portion of deposits banks have to park with the central bank, at 4.75%.
In its nearly two-year long battle against high inflation, the RBI has increased the policy rate 13 times between March 2010 and October 2011 to tame inflation. During 2011-12, headline inflation rate moderated from a peak of 10.0% in September 2011 to 7.7% in March 2012. So far during 2012-13, it inched up from 7.2% in April to 7.6% in May, driven mainly by food and fuel prices.
The supply shocks driving up prices in the country are structural in nature and it is critical that the RBI responds to them, otherwise inflation pressures will get entrenched.