Monetary policy has an important role to play even in situations where inflation has been triggered by supply-side constraints, the PMEAC Chairman, Dr C. Rangarajan, said here today.
He also slammed industrialists and industry bodies for their “in the box thinking” and for never appreciating the need to raise interest rates in such situations.
“When food inflation persists for some time it gets generalised. We should use monetary policy in the way in which demand pressures can be brought down. Supply side constraints do not remain always as supply constraints,” Dr Rangarajan said at an event to mark the golden jubilee celebrations of the Indian Economic Service (IES) here.
He said that demand side pressures have to be acted upon to prevent generalisation of inflation and therefore use of monetary policy was necessary. Dr Rangarajan also said that there needs to be definite signs of inflation falling down for the Reserve Bank of India to reverse its current monetary tightening stance.
On capital flows, Dr Rangarajan said that India must moderate its dependence on capital flows for financing of its current account deficit.
“We must try to ensure that current account deficit in the next five years does not exceed the manageable level of 2.5 per cent of GDP,” he said.
On economic growth, Dr Rangarajan said that the Government cannot afford to sacrifice growth at this current stage. He expects India's GDP growth to be close to eight per cent this fiscal.
Dr Rangarajan also said that India has the potential to grow at nine per cent, but felt that the country should not aspire to grow at rates higher than nine per cent.