Citing a study, Reserve Bank India (RBI) said it cannot pursue a policy of higher inflation tolerance as the means to lower real rates because beyond a threshold, the negative impact of inflation on growth outweighs its positive impact.
Although the study points to empirical evidence that lower real interest rates can stimulate growth and investment, it does not recommend a policy of higher inflation tolerance as the means to lower real rates, RBI said.
RBI is learnt to have conducted the study amidst widespread view that the central bank was following an anti-inflationary monetary policy stance to the detriment of growth.
The study concludes that the adverse impact of higher inflation on growth would more than offset the favourable impact of growth-supportive monetary policy.
The study shows that consumption demand gets reduced because of high inflation and this impacts economic growth adversely.
With a view to contain inflation, the RBI, for a period of more than 18 successive months since July 2011, kept the repo rate at or above 8 per cent. However, it has reduced the rate by 1.25 per cent since the start of fiscal 2012-13.
Leave a Reply
You must be logged in to post a comment.