Reserve Bank of India (RBI) Governor Duvvuri Subbarao said on Tuesday that inflation remains too high and needs to fall further or risk more damage to the economy, dismissing criticism of the bank's hawkish policy stance.
Since cutting its main interest rate in April by more-than-expected 50 basis points to 8 per cent, the RBI has stayed on hold, drawing complaints that high rates are burdening consumers and slowing growth.
Cutting interest rates, however, may only support growth in the short term, while high and persistent inflation will harm the economy longer term, Subbarao said.
Much of the criticism of the bank's policy is coming from a "very articulate" growth lobby, that includes companies, in India, he said. However, the central bank must consider other constituents, including the poor.
"People are hurt by inflation, largely the poor people. They don't have the mechanism to get their voice heard," Subbarao said. He was speaking at an event at Cornell University in Ithaca, New York.
The RBI has been successful in easing price pressures by reducing the inflation rate to 7 per cent from 11 per cent, he said. However, various factors, including high commodity prices, the fiscal deficit and the monsoon, risk pushing it higher.
"I believe that the battle against inflation has not ended yet," Subbarao said, noting that the rate needs to fall below 5 per cent.
At the same time, he conceded that "some sacrifice to growth is an inevitable price" to pay in order to reduce price pressures.
A number of economists have cut their gross domestic product growth forecasts for the current fiscal year in India, Asia's third-largest economy, to around 5.5 per cent. A 5.3 per cent growth in the March quarter was India's slowest in nine years.
At its last review, the central bank raised its headline inflation projection for the year ending in March 2013 to 7 per cent from 6.5 per cent, while lowering its GDP growth forecast to 6.5 per cent from 7.3 per cent.
The RBI has less room to drive monetary policy than in the financial crisis of 2008-09, when people were worried about deflation, Subbarao said. The central bank will only intervene against the currency if it sees clear benefit to its monetary policy and the bank's credibility, noting that "a failed defense of an exchange rate" can be more damaging than no action at all.
The bank is also taking steps to protect against possible ratings downgrades, Subbarao said, but did not give details.
Credit rating agencies Standard & Poor's and Fitch Ratings both rank the country the lowest investment grade, with a negative outlook, which means India risks falling into junk territory.
A junk rating would make its debt less attractive to investors.
Copyright @ Thomson Reuters 2012