Rangarajan pegs FY12 growth at 8%

PMEAC chairman says rate increase by RBI may have some impact on economic growth

After the Reserve Bank of India (RBI) effected another round of increase in key interest rates, the Prime Minister’s Economic Advisory Council (PMEAC) Chairman C Rangarajan, has projected the economic growth in this financial year to slow to about eight per cent from 8.6 per cent a year ago.

PMEAC had earlier projected the economic growth for this financial year at 8.2 per cent. Rangarajan, clarified he did not mean that the economy would definitely not grow by 8.2 per cent.

“GDP growth at around eight per cent means in the region of eight per cent, which might even be 8.2 per cent,” he explained.

He said the rate increase by RBI might have some impact on economic growth.

However, Rangarajan called further monetary tightening by the central bank as the ‘correct’. “With inflation at over nine per cent, the central bank had no other alternative.”

On Friday, RBI raised policy rates by 25 basis points in its mid-quarter monetary review, its 12th such increase since March 2010. As a result, the repo (short-term lending) rate stands at 8.25 per cent and the reverse repo (short-term borrowing) rate at 7.25 per cent, which means real policy rates are still negative if the wholesale price index-based inflation is taken into account. Inflation has been over nine per cent for the ninth month in a row in August, when it stood at 9.78 per cent.

The successive increase in rates by RBI has decelerated economic growth for the second quarter in a row when it stood at 7.7 per cent during April-June, against 8.8 per cent growth in the corresponding period last financial year. Industrial growth also plunged to a 21-month low of 3.3 per cent in July against 9.9 per cent in the same month a year ago.

Earlier, Rangarajan had said the economy would grow by 7.9 per cent in the second quarter and 8.3-8.4 per cent in the third and fourth quarters of this financial year.

These estimates are seen as very optimistic, as most economists have revised their projections for India’s economic growth to below eight per cent for 2011-12.