Monetary tightening needed for sustainable growth: RBI

The Reserve Bank of India (RBI) today said its recent hike in key short-term rates was needed to make growth sustainable as inflationary pressures were stronger than it had anticipated.

"Inflation pressures are stronger than we had anticipated," RBI Governor D Subbarao told reporters, but exuded confidence that inflation will start moderating from June-July.

Subbarao said in taking the policy action of hiking interest rates, the RBI has been very conscious of the fact that monetary policy acts with a lag of 6-12 months. "So, given the inflation pressures and given that growth is consolidating, some normalisation was required," he said in support of the move.

To a question, the governor said he is not saying that the economy is heating up. "I am saying if we do not take action in good time, there is a potential possibility of heating up".

Inflation rose to 9.89 per cent in February from 8.56 per cent in January, breaching the RBI's projection of 8.5 per cent by March-end.

To combat inflationary pressures, the Reserve Bank on Friday had raised short-term lending and borrowing rates by 25 basis points to 5 per cent and 3.5 per cent.

Defending the hike, Subbarao said, "...We may have to sacrifice a little bit of near-term growth in order to consolidate our medium-term growth because if we do not tighten now and take action, ahead of time, the adjustment that we will have to make will be stronger and we might indeed have hard landing."

Earlier in the day, RBI Deputy Governor also said RBI's move was "right on the curve" and inflation would ease in coming months subject to normal monsoon and stability in global oil prices.

Subbarao said even if there was a short-term trade off between growth and inflation, it is important in the medium term that inflation is kept low in order for growth to be sustainable.

He said "growth is consolidating". Industry growth continued to be in double digits for the fifth consecutive month in January.

Hinting that food inflation is now moderating and fuel inflation is on rise, Subbarao said, "The contribution of food to inflation was almost 100 per cent in November 2009 and has now dwindled to 50 per cent... Fuel inflation was negative 0.8 per cent in November last year, had gone up to 10.2 per cent last month."

He said there is enough liquidity in the system today, but there is also the government borrowings coming up, for which the calendar will be discussed early next week. "Private credit demand is also picking up," he said.

The RBI's move to raise short term rates came a month in advance of its annual monetary policy on April 20.

In its January policy review, RBI had asked banks to keep more money with the central bank to suck out Rs 36,000 crore.