Defending the Reserve Bank of India's (RBI) decision not to cut key lending rates, Governor Duvvuri Subbarao has said inflation is still above acceptable levels and that several factors like rupee depreciation and high fiscal deficit are impacting growth.
"It (inflation) is even today above acceptable levels. What is driving inflation? It is the food inflation which is very high. Prices of vegetables and fruits are very high and as wages go up, dietary habits change and people tend to consume more of protein food and inflation of protein food are at 15 per cent," Subbarao said an industry event.
"Fiscal deficit is also driving inflation because government is spending, fiscal deficit on increasing wages and as wages increases than so is the consumption and especially in the case of poor people when wages increase they tend to consume more rather than save it."
Subbarao also said the government must cut spending and not just raise taxes for fiscal consolidation.
Subbarao's comments came a day after RBI kept the repo and cash reserve ratio (CRR) rates unchanged, saying increased liquidity would further spike inflation.
"While growth in 2011-12 has moderated significantly, headline inflation remains above levels consistent with sustainable growth. Importantly, retail inflation is also on an uptrend," the apex bank said on Monday.
The overall inflation moved up to 7.55 per cent in May, compared to 7.23 per cent in the previous month. Food inflation rose to 10.74 per cent in May, compared to 8.25 per cent in the previous month as vegetables, pulses, milk, eggs, meat and fish became costlier, pinching the pockets of common people.
To tackle inflation, the central bank raised its key lending rate 13 times since March 2010 but began reversing the rate cycle by cutting the repo rate (short-term lending rates) by 50 basis points in April.