Inflation Can be Reduced 4-4.5%: Subbarao

Reserve Bank Governor D Subbarao today said inflation can be brought down to 4-4.5 per cent in the medium term while admitting that the economic expansion is being sacrificed to ensure sustainable growth in the long run. "I believe that there is no new normal to inflation. We can bring it down to 5 per cent, and then further down to 4-4.5 per cent in the medium term," Subbarao said. Taking on the criticism that the monetary authority is ignoring slowdown warnings across sectors in its fight against inflation, he said, "Yes. We are sacrificing growth... In the short-term. But it is only to ensure sustainable growth in the medium term." The Governor was speaking at an event to launch a book, 'Growth With Financial Stability: Central Banking in an Emerging Market' by former RBI Deputy Governor Rakesh Mohan. "Our experience shows that when inflation is low, may be you can raise it somewhat and get high growth, but up to a threshold level. Beyond that threshold level, if you try to raise growth, by raising inflation, you actually end up with higher inflation and lower growth," he noted. Pointing out limitations of the monetary measures to tame inflation, he said, "With one instrument,that is interest rate, you cannot at the same time restrain consumption and support investment. So, in the short-term you may have to sacrifice growth to generate an environment of rapid growth and steady inflation in the medium term." As inflation remained elevated, over the past 16 months RBI upped its key policy rates a record 11 times or 325 basis points.  Core inflation for June stood at 9.44 per cent while food inflation for the week ended July 23, inched up to 8.04 per cent, after dropping to a 20-month low in mid-July. He also set the desired threshold level for inflation at 5 per cent. "The question is what is the threshold of inflation level for a country like ours? Some RBI report shows that it is 5 per cent, may be that number has changed, but at 9.44 per cent inflation, possibly even higher, we are far above the threshold," said Subbarao. In the July 26 policy review, the central bank had said that monetary policy alone cannot be expected to batten down prices.

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