Can't curb inflation without sacrificing growth: Subbarao

This comes at a time when economists and experts expect the central bank to dole out a rate cut come Monday to give the sagging economy a boost. Poor industrial output data further fuelled expectations, but inflation for May at 7.4% played spoilsport.

Nevertheless, fingers are still crossed that the RBI either cuts repo rates by 25 basis points or a cut in the cash reserve ratio.

Today’s comments by Subbarao at an RBI event however indicate that growth continues to remain at the back seat for the central bank, and that decisions will be taken based upon the prevailing inflation rate. “Sacrificing GDP in the short-term is a small price for the medium-term,” he said.

India has already paid a price for slowing growth, with rating agencies putting India on a negative outlook. S&P recently said that it might downgrade India to investment grade if we cannot pick up the pace of economic growth.

Another factor working against India is the depreciating rupee. Over the past month, the Indian currency sliced through support levels and hit new lows on a daily basis despite Reserve Bank intervention. Subbarao today said that the rupee rate is market determined, and that the central bank does not target any rate level when it intervenes in the foreign exchange market.

The main reason for the rupee’s sharp fall is India’s current account deficit, but Subbarao assures that the balance of payment crisis is not as bad as the situation in 1991. “We have a war chest of forex reserves at our disposal,” he added.