No direct correspondence between rate hike, inflation: FM

The government today said that there is no direct "correspondence" between the quantum of increase in interest rates and fall in inflation.

In a written reply to the Rajya Sabha, Finance Minister Pranab Mukherjee said that monetary policy measures are not aimed at merely controlling pressure from inflation.

"Monetary policy rate hikes seek to affect the macro economy through a compression in aggregate demand and are aimed at not only controlling inflationary pressure but also inflation expectations.

"There is, as such, no direct one-to-one correspondence between the quantum of increase in interest rates and reduction in the levels of inflation," he said.

 

Mukherjee said that as interest rate hikes push up costs of borrowing and, thereby, cost of products and services in general, a part of the costs in likely to be passed on to the consumers.

"Higher end-product prices or end-service prices would help lower aggregate demand and arrest inflationary pressures emanating therefrom," he said.

Inflation has been above the 9%-mark since December last year and stood at 9.73% in October this year. The Reserve Bank has hiked lending rates 13 times by a total of 350 basis points since March, 2010, to curb demand to tame inflation.

Mukherjee said that to lessen the burden of rising interest rates on the vulnerable sections, the government has been giving selective interest subvention in some areas.

"Besides, the government is also addressing supply side constraints through a slew of measures," he said.