New Delhi: Inflation cannot be contained without sacrificing economic growth to some extent, the Reserve Bank of India Governor D Subbarao said as per media reports, raising concerns that the central bank may keep policy rates unchanged in its mid-quarterly monetary policy review due June 18 amid cries for rate cut getting louder to support India's faltering economic growth, which tumbled to a nine-year low in the March quarter.
"You cannot control inflation without sacrificing some growth. After all, you have to contain demand. When you contain demand, growth comes down. So there is no way of bringing down inflation without sacrificing some growth," media reports quoted Subbarao as saying earlier Thursday.
Short-term sacrifice in growth is a small price to pay for bringing down inflation, so that growth can be secured in the medium term, he added.
India's wholesale price index (WPI) inflation accelerated to 7.55% on-year in May from 7.23% recorded in April due to rise in food and fuel prices, which is still higher than the RBI's comfort level of 5%-6%. However, non-food manufactured products inflation, or core inflation, has cooled quite significantly since December 2011 although it quickened slightly to 5.74% in May.
Expectations of a policy rate cut have been high following Deputy Governor Subir Gokarn's comments that the RBI may some have some elbow room to cut interest rates as growth has slowed more than anticipated and crude oil prices have fallen.
The comments of Gokarn, who handles monetary policy, were in contrast to the RBI's stance underlined in its latest policy statement that said further room for rate cut may be limited due to upside risks to inflation emanating from incomplete pass-through of crude oil prices.
In April, the RBI had cut the repo rate -- short term lending rate -- by a higher-than-expected 50 basis points to support India's faltering economy.
Further, Subbarao sought to allay fears over the country's weak economic health, saying that it is "highly improbable" that the country will slip into a 1991-type balance of payments crisis.
"Today exchange rate is market determined which is a great strength, the country has $285 billion foreign exchange reserves," Subbarao said.
India is a $2 trillion economy today, which is much higher than the $200 billion economy it was in 1991, he pointed out.
Recently, Finance Minister Pranab Mukherjee also dismissed comparisons of the current economic situation with the one experienced during the turmoil of 1990s when the country was left with only 17 days of foreign exchange reserves, but admitted that the present environment is worrying.
Earlier, the RBI had hiked key policy rate -- repo -- by 375 basis points in 13 tranches between March 2010 and October 2011 to tame stubbornly high inflation, until it pressed the pause button on rate hikes in December 2011 to address concerns about deteriorating economic growth.
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