RBI step will help tame inflation, says FM

The government on Friday exuded confidence that the Reserve Bank of India’s move to raise policy rates by 25 basis points would soon help bring down inflation to a “more comfortable situation”, but acknowledged that the monetary tightening had hurt economic growth.

“I am hopeful that the measure taken by the RBI would get us back to a more comfortable inflation situation earlier rather than later,” Finance Minister Pranab Mukherjee said here. Mukherjee had earlier hoped the RBI would not continue with its tight monetary policy.

Headline inflation continues to be a matter of concern at over nine per cent, with significant supply- and demand-side factors contributing to it, he said. Inflation has remained over nine per cent for the ninth month in a row till August this year.

The minister, in a statement, also said there were signs of monetary tightening affecting growth. This was shown in the recent data on the real economy, he added.

The Planning Commission termed RBI’s step as “not unreasonable” and a signal to bring inflation under control. “RBI is signalling its concern about bringing inflation under control. It (inflation) is high,” Planning Commission deputy chairman Montek Singh Ahluwalia said. “The rate hike is within a range that is not unreasonable,” he told reporters.

Ahluwalia hoped inflation would come down, in view of a softening of prices across the globe due to prevailing sluggishness in the world economy and good harvest expected this year. “On the supply side, a good harvest will have a positive effect. My guess is that the global transmission of inflation will also be much less. Taking all things together, I think, the inflation will moderate,” he said.

The Prime Minister's Economic Advisory Council said the central bank had no option but to increase the policy rates. "The 25-basis point hike (in policy rates) by the RBI is the correct and the most appropriate one against the background of rising inflation,” its chairman, C Rangarajan, said. “With over 9 per cent inflation, RBI had no alternative.”

India’s economic growth decelerated below eight per cent for the second quarter in a row to 7.7 per cent for April-June, 2011-12, compared to 8.8 per cent in the corresponding period of last year. This is despite a downward revision of economic growth from 9.3 per cent estimated earlier for the first quarter of last year. Had the growth remained the same during April-June, the GDP would have expanded by just 7.2 per cent in the first quarter of this fiscal, analysts say.

Also, industrial growth fell to a 21-month low of 3.3 per cent in July against 9.9 per cent in the year-ago month. For the first four months of this year, industry grew by 5.8 per cent against 9.7 per cent during April-July. The minister, however, exuded confidence that RBI’s measure would leave scope for growth to pick up in the second half of the year.

It is for the 12th time the RBI raised policy rates — to tame inflation. The step “is consistent with its monetary stance for the first half of 2011-12 and the overall concerns on growth sustainability in the medium term”, he added.

Earlier in Kolkata, the minister had said, “As far as tightening monetary policy is concerned, if these policies need to be extended, then it will have some impact on overall growth scenario. But I am optimistic that it will not have to be extended.”