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| RBI's rate increase may not be the last: Pranab |
| BS Reporter / New Delhi/ Mumbai Jul 28, 2011, 00:42 IST |
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Govt to take steps to support RBI’s war on inflation.
 Finance Minister Pranab Mukherjee on Wednesday dashed even faint hopes of a pause in the Reserve Bank of India’s (RBI’s) rate tightening cycle. Speaking to reporters a day after RBI stunned everybody with a 50 basis points (bps) increase in the repo rate, Mukherjee indicated this might not be the last increase.
“I don’t think we have reached the end of the tunnel,” Mukherjee said, when asked if RBI was nearing the end of the rate increase cycle.
Yesterday’s rate increase has drawn criticism from companies worried about higher borrowing costs and prompted economists to revise their growth outlook. Standard Chartered Bank has reduced its gross domestic product growth forecast for this financial year from 8.1 per cent to 7.7 per cent. Kotak has cut its growth forecast to 7.3 per cent from 7.7 per cent, among the lowest in the market.
The benchmark 10-year bond yield on Wednesday hit its highest level in almost three years after rising 15 bps yesterday. Stocks continued their slide, losing nearly 0.5 per cent, and are down 10 per cent this year.
Mukherjee also sought to put a lid on murmurs over a finance ministry-RBI divide over steps to be taken to curb inflation, and pledged support to RBI in its fight against inflation.
RBI had said yesterday that its measure (repo rate increase) was expected to reinforce the point that there was an absence of complementary policy responses on both demand and supply sides.
Asked if he was surprised by the 50 bps increase, Mukherjee said, “I cannot say it surprised me. It is substantial no doubt, but given the situation it was necessary.”
Admitting that the 9.4 per cent inflation in June was “unacceptable”, Mukherjee said high prices were a global phenomenon and the whole world was reeling under rising prices of fuel and other commodities.
The government and RBI were taking steps to check inflation, he said, adding, “I am optimistic that the measures taken by RBI by adjusting the crucial rate will have an impact and inflation will come down.”
The inflation, Mukherjee said, might not come down to below 6-7 per cent by the end of the current financial year.
In an economy, Mukherjee said, “You cannot have a carpet under which you can keep all these things and at the same time expect these things will remain stable”.
He said crude oil prices went up from $89 per barrel when the Budget calculations were done to $107-110 a barrel.
He said he would take up the issue of volatility in commodity and crude oil prices at the international fora, including the G-20.
Meanwhile, the Financial Stability and Development Council, a body of the finance ministry and financial sector regulators, expressed confidence that the growth momentum would be maintained despite yesterday’s steep repo rate increase.
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