Low inflation must for sustained growth: RBI

Reserve Bank of India deputy governor Rakesh Mohan today contested the notion that a certain degree of inflation is a necessary...

Reserve Bank of India (RBI) deputy governor Rakesh Mohan today contested the notion that a certain degree of inflation is a necessary and entirely acceptable price that can be paid in the pursuit of sustained economic growth.

Speaking at the annual conference of the Confederation of Indian Industry (CII)-western region here, he pointed out that high inflation has a direct adverse effect on aggregate demand, through which it indirectly hurts the economic growth rate itself.

First of all, he said, by hurting the common man it dampens total consumption. Secondly, it also puts brakes on fresh investments that are the key to faster economic expansion. Thus, containing prices is an express requirement for he sustainment of the growth process, Mohan concluded.

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“Inflation is adding to the existing risks taken by entrepreneurs, which leads to much less investments. Therefore, low and stable inflation is needed,” the RBI deputy governor said. “For maintenance of high growth, it is important that inflation and inflation expectations are well anchored.”

Mohan said that conditions of price and financial stability, low inflation and inflation expectation help sustain the momentum of investment and growth and observed that the financial system is not geared up to fund new ideas.

Credit growth to small and medium enterprises (SMEs) is still low, he pointed out, which implies that banks have moved straight from corporates to individuals — almost entirely missing out the middle. Mohan said that the RBI would soon come out with guidelines for the Credit Information Bureau, which would reduce transaction costs by allowing banks to take informed decisions. “The country may be moving towards a sustainable path of 8 to 8.5 gross domestic product (GDP) growth and the growth momentum has to be maintained with price stability,” he added.

On Monday, RBI governor Y V Reddy had said the focus of the monetary policy would be on price stability.