FinMin: RBI rate rises helped control inflation

Defending interest rate rises by the Reserve Bank of India (RBI) in Parliament, the finance ministry on Tuesday said in the absence of monetary tightening, inflation would have been higher due to demand pressures.

“The monetary policy operates with long and variable lags. The transmission of monetary policy action taken in the past is still playing out. But, inflationary pressures have persisted due to a combination of supply and demand factors,” Minister of State for Finance Namo Narain Meena said in a written reply in the Rajya Sabha.

In reply to a question on whether frequent changes in interest rates had been effective in reducing inflation during the current financial year, Meena said RBI’s monetary tightening had helped moderate aggregate demand.

The minister said a series of supply shocks, particularly of global commodities, had raised input costs — it spilled over to the general inflation process reflecting robust demand.

“Credit growth also moderated from the peak of 24.2 per cent in end December 2010 to 18.6 per cent in mid-July 2011. In the absence of (monetary) tightening, inflation perhaps would have been higher on account of demand pressures,” he said.

Headline inflation, as measured by the Wholesale Price Index (WPI), stood at 9.44 per cent in June. The RBI has projected inflation to remain around nine per cent during the first half of the fiscal and moderate to seven per cent by March 2012.

Meena informed Rajya Sabha that since mid-March, RBI had raised the Repo rate by 325 basis points. In February 2010, the year-on-year WPI inflation stood at 9.7 per cent and the Repo rate at that time was 4.75 per cent.

In June 2011, the Repo rate reached eight per cent and WPI inflation for the month was 9.4 per cent.