High inflation in India, previously considered unacceptable, has become “the new norm” and the Reserve Bank of India (RBI) cannot afford to drop its guard, a deputy governor said on Tuesday.
The Reserve Bank of India has raised interest rates eight times since March 2010, with more rises expected, but headline inflation still topped expectations at 8.31 percent in February.
“Despite significant actions on policy rates and liquidity by the Reserve Bank of India, inflation remains high, giving rise to some very fundamental questions,” RBI Deputy Governor Subir Gokarn said.
“This higher rate of inflation previously believed to be unacceptable is now the new norm,” Gokarn said.
Gokarn said high growth — the economy is expected to have expanded by 8.6 percent in the year that ended in March — was contributing to high inflation.
“India’s central bank cannot afford to be slack on inflation,” Gokarn said after his speech. “Restraint now for growth later is the tradeoff that needs to be kept in mind”.
The benchmark five-year overnight indexed swap rate rose 7 basis points to 8 percent from the day’s low while the one-year rate climbed 8 basis points to 7.44 percent after the statements from Gokarn were perceived to be hawkish. They had closed at 7.96 percent and 7.39 percent respectively on Thursday.
Inflation across Asia has been on the rise as central banks appear willing to tolerate rising prices as a side effect of rapid growth.
While India’s longer-term prospects remain bright, at least four major banks have cut growth forecasts in recent weeks for India in the year that started in April.
The latest cut came on Monday from Credit Suisse, which lowered its 2011/12 growth estimate to 7.5 percent from 7.7 percent while raising its average wholesale price index inflation projection to 7.6 percent from 7.0 percent for the year.