Persistent high rates of inflation could lead to a slowdown in economic growth because the prospect of macroeconomic instability would lead to lower rates of investment. It is also wrong to conclude that inflation is part of high growth, RBI deputy governor Subir Gokarn has said.
There have, of course, been periods when inflation rates have been high, but these have typically been followed by a slowdown in growth rates, presumably as a result of monetary actions but, more fundamentally, faster growth seems to persist in an environment of low inflation, Gokarn said while addressing the FICCI's National Executive Committee Meeting on Tuesday.
The reemergence of high inflation, after a relatively long phase of benign, growth-friendly macroeconomic conditions, is a challenge to both policy makers and stakeholders, he said.
Despite significant actions on both policy rates and liquidity by the Reserve Bank, inflation in the country continues to remain high.
The question now, he said, is whether this high rate of inflation, previously believed to be unacceptable, is now the new normal? or is it a price to be paid for sustaining the current growth trend?
Experience over the past two decades show that the wholesale price index (WPI), which reflects headline inflation and the non-food manufacturing component of it, which is driven by demand side pressures have kept a close relationship.