Pranab supports RBI move

While industry chambers give a thumbs-down, saying growth will be hit.

Union finance minister Pranab Mukherjee on Tuesday backed the Reserve Bank of India’s aggressive policy action, saying the central bank had sought to give a strong signal to further moderate inflation and check inflationary expectations.

However, industry chambers slammed RBI’s action on a 50-basis point rise in the repo (short-term lending) rate.

With RBI’s action, the finance minister said he expected inflation to fall in the range of six to seven per cent by the end of 2011-12, from the current 9.44 per cent. He said while food inflation had softened in recent months, non-food inflation had hardened.

The Confederation of Indian Industry (CII) said with 11 consecutive interest rate increases in 15 months, RBI had emerged as the most aggressive central bank tasked with containing inflation. CII director general Chandrajit Banerjee said it was imperative that non-monetary measures were rapidly deployed to deal with supply-side issues, which continue to contribute to inflationary pressures.

The Federation of Indian Chambers of Commerce and Industry (Ficci) said RBI’s move was a major disappointment to industry. Ficci secretary general Rajiv Kumar also asked the government to have a hard look at supply-side constraints to lessen RBI’s burden in controlling inflation.

The finance minister said despite the slowing in industrial growth and moderation in the expansion of interest-sensitive sectors, the overall momentum in GDP growth for 2011-12 was in line with the momentum attained in 2010-11. Meaning, economic growth would be close to the 8.5 per cent recorded last year. This is higher than RBI’s own projection of eight per cent growth for 2011-12.

But, the chambers were again not impressed. CII said, “At a time when all available data indicate a clear slowdown in industrial and economic growth, this (RBI’s action) is a matter of great concern, since there could be a tipping point beyond which salvaging a downward spiral of growth could be an arduous task.”

In this situation, a more than expected increase in the repo rate would also hurt sentiments, the chamber said. Ficci said: “With the growth momentum already under pressure, the RBI step will further hurt future prospects.”

“Even the projected growth rate of eight per cent for 2011-12 now looks difficult to achieve,” said Rajiv Kumar.