Core inflation must fall to trigger rate cuts: Chakrabarty

The twin problems of high fiscal and current account deficits were also coming in the way of lowering policy interest rates, strengthening rupee and fostering growth, he said at an Assocham banking conference here.

While "explosive growth" of 8-10% is desired for the next 20 years, he said factory capacity must be expanded to sustain such growth. Otherwise, it creates “over-heating” in the economy and fuels inflation. “The moment growth passes 8%, we have inflation. We must create capacity,” he said urging industry captains to invest more for capacity expansion.

India's gross domestic product expanded by 5.5% in Apr-Jun, tad higher than 5.3% in the previous quarter but significantly lower than 6.5% recorded for the entire 2011-12 as global economic crisis coupled with policy paralysis at the government and high borrowing costs stalled investment.

Unlike the quick response to the 2008 crisis, the government could not roll out stimulus by way of higher spending and tax cuts as it was hamstrung by a high deficit of 5.8% in 2011-12, while near double-digit inflation prevented RBI to cut rates aggressively.

After cutting policy rates by 50 basis points in April, RBI paused on rates in the subsequent policy reviews citing high inflation and government's budget deficit. Though the central bank offered some relief by paring cash reserve ratio by 50

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