According to a report from the Reserve Bank of India, Wholesale price index (WPI) based inflation has shown a negative impact on Growth. The Empirical data (April –June quarter of 1996-97 to October-December quarter of 2010-11) has also shown a negative impact on Growth. Addition to that statistical data there is structural break in relation between the Growth and Inflation. The report said that the positive impact of growth was due to the WPI inflation which is up to 5.5%. It also said if the WPI inflation went beyond 5.5% it would show negative impact.
Reports said that the estimated gain can be achieved only if the WPI inflation is under the threshold limit. The inflation is nearing the double digit about 9.78% during August which is higher than the previous month 9.22%.
Economists have suggested that the RBI should follow the anti-inflationary policy in order to control the inflation. They have said that the RBI has increased the short term interest rates 12 times to control the inflationary pressures and that it is better to maintain the same policy because premature change in the policy it will harden the inflationary expectations.
The Empirical data has said that the positive correlation is possible between the growth and inflation if it is low, or else it gives negative correlation. There exists a significant lags in the monetary policy transmission. The objective of the central bank is to maintain the balance between growth and inflation of about 4-4.5% range consistently.
Banks are now facing the heat of continuous hike in key policy rates by the RBI. Banks are forced to hiked the lending rates which has made retail loans such as home loan, personal loans, car loans etc very expensive.