Inflation may hurt investments, growth: RBI

FCA, Future CA

The Reserve Bank of India has probably, for the first time in many years, said that inflation may 'spiral' out of control, hurting investments and economic growth. 

This is an indication that policy rates will keep rising till it re-creates an atmosphere for sustained growth. 

"The current rate of inflation does raise concerns about the risks of spiralling, as high inflation becomes increasingly entrenched into the wage and price-setting behaviour of workers and producers," Subir Gokarn , deputy governor at the Reserve Bank of India, told an industry conference. 

"In turn, if this were to adversely impact investment activity, the growth momentum would inevitably slow down. In essence, the trade-off is more between inflation now, and growth in the future," Mr Sbir Gokarn said. 

India's inflation that started climbing due to food prices two years ago and is fast spreading to all parts of the economy. That is forcing wage-earners to seek higher salaries and is triggering product price increases. 

Wholesale prices rose 8.31% in Feburary, above the RBI's 8% target that was revised many times. 

Food inflation was at 9.5% for the week ended March 19.

RBI raised rates eight times in 13 months to 6.75%, but the negative real return continues. 

"It signifies the extent or magnitude of the spill-over of higher food and oil prices to generalised inflation," said Deepali Bhargava, chief economist at ING Vysya Bank

Central bankers, inspired by former US Federal Reserve chairman Alan Greenspan, are careful in their diction to describe the state of the macro economy. The RBI has been gradually moving to accepting that price rise is now widespread, after arguing that monetary policy is ineffective in tackling supply-side induced inflation. In the last few quarters, it shifted to saying that supply side is 'spilling over' to manufacturing that could keep inflation at elevated levels. Economists tracking the central bank say, this may be first time that the word 'spiralling' is being used by a top central banker. It could not be confirmed. 

Inflation is threatening to plunge economies into crisis. China raised interest rates for the fourth time since the crisis ended, and US Fed chairman Ben Bernanke and Jean Claude Trichet of the European Central Bank are joining the chorus about the destabilising effects of price rise. 

"We have to monitor inflation and inflation expectations extremely closely because if my assumptions prove not to be correct, then we would certainly have to respond to that and ensure that we maintain price stability," Ben Bernanke said on Monday. 

The desire for above average economic growth may force people to live with higher prices for a sustained period. 

"Acceptance of a higher rate of inflation as the new normal - an inevitable consequence of rapid growth - will raise risk of accelerating inflation," said Gokarn. "If in fact, the contribution of investment spending to growth is declining, the constraints can only become more binding, further aggravating inflationary pressures." 

Crude oil prices near $120 a barrel and copper, lead and silver prices at historic highs could accelerate further as investors losing faith in paper currency chase real assets.


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