“Acceptance of higher inflation rate as the new normal will raise risks of accelerating inflation,” Subir Gokarn, deputy governor, Reserve Bank of India (RBI), said on Tuesday, adding the economy has to avoid the vicious circle of high inflation, low investment and slow growth. The economy should get into a virtuous cycle of low inflation, high investment and fiscal consolidation accompanying high growth, he said.
Headline inflation stood at 8.31% in February after a gruelling year in which food inflation hovered close to double-digits.
“Despite significant actions on policy rates and liquidity by the Reserve Bank of India, inflation remains high, giving rise to some very fundamental questions,” said Gokarn while speaking at the meeting of the national executive committee of FICCI.
Highlighting on the need to tackle inflation Gokarn said, “India’s central bank cannot afford to be slack on inflation.”
The current rate of inflation raises concerns about the risks of spiralling and may slow down the growth momentum, he said. “In essence, the trade-off is more between inflation now and growth in the future. The only way to keep food prices in check is to produce more than what people want to consume.”
The RBI has already raised interest rates eight times since March 2010.