FM sees RBI move stifling growth in the short term

Finance Minister Pranab Mukherjee on Tuesday admitted the Reserve Bank of India’s (RBI) latest round of rate increase would have some impact on economic growth, which had already decelerated to a six-quarter low of 7.7 per cent in the April-June period of the current financial year. He, however, exuded confidence that gross domestic product (GDP) growth would pick up from the second half of this financial year.

“Of course, it would have some impact on growth...,” Mukherjee told reporters here. However, the tight monetary stance would help in taming inflation as well, he added. “I hope RBI’s decision to enhance the repo rate and reverse repo rate by 25 basis points would have its impact on inflation,” he said.

RBI has also lowered its GDP forecast for this financial year to 7.6 per cent, compared with its earlier projection of eight per cent, in the policy review. “The rate rise has implications for credit costs and investment growth,” said an official statement by the finance minister. “This would help in getting us back to a more comfortable inflation situation soon, while leaving scope for growth to pick up in the second half of current financial year,” the statement added.

Mukherjee said the decision was taken by RBI to affirm its commitment to tackle inflation, as headline inflation was still high. Headline inflation remained above the nine per cent mark since December 2010. In September this year, it stood at 9.72 per cent.

RBI's tight monetary stance is slackening industrial production figures, since funds are getting costlier. Industrial production grew by less than five per cent for the second month in a row in August. “We are looking at all options for strengthening investment sentiments in the coming months,” the finance minister said.