High inflation is not ‘the new norm’, must be curbed: RBI

In sharp comment against some Indian policy-makers accepting high inflation as a consequence of economic growth, Reserve Bank of India governor Duvvuri Subbarao today said the central bank (RBI) rejects the notion that high inflation is the "new normal".

The RBI governor said many of the supply-driven causes of inflation can be corrected by appropriate policies.

"Accepting a new normal for inflation not only has no theoretical or empirical support, but entails the moral hazard of policy inaction in dealing with supply constraints," Subbarao said in a speech to bankers, the text of which was publicised today.

India's headline or wholesale price inflation was above 7 per cent for the last three years before falling to 6.6 per cent in January; when RBI promptly cut policy rates after nine months of holding them steady.

"The 'new normal' argument is that it will be politically difficult to reverse these entitlement programmes, they are here to stay, and that India should accept wage-price pressures as a structural feature and adjust its inflation goal accordingly," Subbarao said in a clear dig at the government's expensive social welfare programmes.

"We must recognise that the government does not have the fiscal capacity to continue entitlements and welfare programmes at this level. The government's embracing fiscal responsibility will act as a self-limiting check on the wage-price spiral."