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Low, Stable Inflation 'Necessary' for Sustained Growth -RBI's Subbarao

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12/01/2012 | 03:17pm CEST

By Khushita Vasant

MUMBAI--Reserve Bank of India Governor Duvvuri Subbarao on Saturday defended the bank's refusal to cut interest rates even as economic growth staggers, saying benign inflation is a "necessary condition" for sustained growth.

"To promote sustainable, steady and high growth, you need low and stable inflation," Mr. Subbarao said at an event.

C. Rangarajan, the chairman of an economic advisory panel to Prime Minister Manmohan Singh concurred. The primary objective and "the dominant objective of monetary policy is to control inflation," he said.

India's inflation remains high despite a slowdown in growth. Economists say New Delhi's loose fiscal policies with large welfare spending and fuel subsidies are the main factors driving inflation. High global oil prices and a weaker local currency also increase price pressures.

The central bank is under intense pressure from the government and industry bodies to cut interest rates so as to lower borrowing costs and boost growth. At its Oct. 30 rate-setting meeting, the RBI left its key lending rate unchanged at 8.0% for a fourth successive time since April on expectations that inflation may remain high at least until December. The governor had then said inflation could rise to over 8% in January.

Wholesale price index-based inflation in India eased to 7.45% in October from 7.81% in September, latest data show. But the pace is "still quite high," Mr. Subbarao had said last month after the data.

Still, hopes of an interest rate cut in the January-March quarter remain as economic activity flounders.

Government data Friday show that gross domestic product rose 5.3% in the July-September quarter from a year earlier--broadly in line with expectations--but much lower than the more than 8% growth rate witnessed just a few years ago.

Mr. Rangarajan admitted that the Indian economy is passing through a phase of decline in growth rate, but "I don't see any reason why we should get stuck at 5.3% or even 5.5%" growth rate.

In the long term, economic growth rate should return to 7%-8%, he added.

Write to Khushita Vasant at khushita.vasant@dowjones.com

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