Reserve Bank of India (RBI) Deputy Governor Subir Gokarn on Tuesday said India cannot risk accepting high inflation as the new normal, nor can RBI afford to drop its guard.
Accepting a higher rate of inflation as the new normal would raise the risk of accelerating inflation and would, in turn, weaken the incentives for investment.
This would threaten growth sustainability, he said.
Addressing a conference of business leaders organised by the Federation of Indian Chambers of Commerce and Industry, Gokarn said both monetary and fiscal policies have a role to play in tackling the current phase of high inflation, which started out as high food prices, but has now become more generalised.
"We cannot afford to be standing by, while inflationary forces are gaining momentum," Gokarn said. He said the issue is not as much of higher inflation, as it is of faster growth.
The
risks posed by high inflation to growth in the future are critical, he said, adding sustainability of growth over the long term required controlling inflation.
"In essence, the trade-off is more between inflation now and growth in the future," said Gokarn.
Speaking on inflation, HSBC Group General Manager and Country Head Naina Lal Kidwai said there was a current concern of interest rates beginning to slow growth.
The issue would be whether it would slow investment in the near term or in the long term, she said, adding the balancing act between inflation and growth was tough.
"Inflation looks like it is the new norm...because of food and energy prices. Whether that will translate into a high interest rate regime is yet to be seen because of this balancing act.
I have no doubt both the regulator and the government are very conscious of not stalling the investment story. So, the key is the level till which you can control inflation rates without impairing growth," she said.
Accepting a higher rate of inflation as the new normal would raise the risk of accelerating inflation and would, in turn, weaken the incentives for investment.