Ahead of the policy review next week, RBI Governor D Subbarao today said inflation reading of above 6 per cent demands tightening of the monetary policy stance.
"Inflation above 6 per cent would justify, indeed demand, tightening of the monetary policy stance. It is this understanding that has informed our monetary policy stance," Subbarao said while delivering the fifth IG Patel memorial lecture at the London School of Economics.
"Monetary policy is inevitably the first line of defence to guard against inflation getting generalised through unhinged inflation expectations," the Governor said, adding he wants inflation to ideally be in the 4-6 per cent range.
The views come amidst continuing calls for a rate cut, which can help revive India's sagging GDP growth that hit a decadal low of 4.5 per cent in the third quarter of FY'13.
While headline inflation moderated to a four-year low of 6.62 per cent in January, the retail price index sniffed at 11 per cent in February.
All eyes are on February inflation readings scheduled for tomorrow. However, it is widely believed that RBI primarily focuses on the WPI numbers.
Most analysts are expecting the RBI to do a trade off with growth with at least a 25 bps cut in the short-term lending rate at the March 19 policy meet.
"The Reserve Bank has to ensure inflation is brought down to the threshold level and is maintained there," Subbarao said. He emphasised that high rates dent growth only in the short-term but in the medium-term, there is no such trade-off.
He, however, maintained the long-regaled 'India (growth) story' is still credible but "we need to do the right things" to get back on the high growth trajectory and called for "vigorous and purposeful structural and governance reforms" to achieve the same.
"The Government has to be at the centre of this and lead the process of economic revival. As the central bank and as the regulator of large segments of the financial sector, the Reserve Bank, too, has an important role to play in this," he said.
