RBI move to hurt short-term growth: Pranab

Finance Minister Pranab Mukherjee today admitted the RBI's move to hike short-term lending and borrowing rates will hurt growth in the near-term, but exuded confidence that economic expansion will gather pace later as a consequence.

Mukherjee said the RBI took the decision at a difficult time, when the economy is still witnessing high prices and some slackening of industrial growth.

"This tightening may have some negative impact on the growth rate, but I expect such an effect to be only a short one. In the medium to long-term, the changes announced by the RBI today should actually help the Indian economy do better in terms of growth," Mukherjee said in a statement here.

"Today is not such an easy time. The signals from the economy have been mixed. Industrial growth showed a slight slowing down in August. Inflation, while less than what it was some months ago, is still not in a zone where we can sit back," he added.

Inflation moderated to 8.62 per cent in September, but is still above the comfort level of 5-6 per cent. Food inflation has also declined and stood at 13.75 per cent for the week ended October 16.

Industrial growth, on the other hand, slowed to a 15- month low of 5.6 per cent in August. Recent output figures for the core sector also paint a dismal picture. Growth of the six core sector industries, which have over 26 per cent weight in the index of industrial production, fell to an 18-month low of 2.5 per cent in September.

The Finance Minister said," I respect this (RBI) decision made in a difficult time. This will create the monetary tightening in the country without narrowing the LAF corridor."

The RBI upped short term lending (repo) rate and borrowing (reverse repo) rates by 25 basis points each, thereby maintaining the difference between the two rates, known as the liquidity adjustment facility (LAF) corridor, unchanged at 1 per cent.