New Delhi, Sep 16: The Planning Commission on Friday said the decision of the Reserve Bank to raise interest rates by 25 basis points is not unreasonable and a signal to bring inflation under control.
“RBI is signalling their concern about bringing inflation under control. It (inflation) is high. The rate hike is within a range that is not unreasonable,” Planning Commission Deputy Chairman Montek Singh Ahluwalia told reporters here.
Following the increase announced by the RBI, the short-term lending (repo) rate stands at 8.25 per cent and the short-term borrowing rate (reverse repo) at 7.25 per cent.
Mr. Ahluwalia expressed optimism that inflation will come down in view of softening of prices across the globe due to prevailing sluggishness in the economy and good harvest expected this year.
“I think on the supply side also good harvest will have 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 added.
About the impact of decline in value of rupee against dollar on economy, Mr. Ahluwalia said, “(Foreign) reserves are very high so I don't see any panic effect (due to low rupee).”
Defending the Reserve Bank's decision to hike key rates by 25 basis points, the Prime Minister's Economic Advisory Council on Friday said the central bank had no other option, as inflation remains at elevated levels.
“The RBI has taken the correct decision. In the context of rising inflation, RBI had no other option but to raise interest rates,” PMEAC Chairman C. Rangarajan said.
Rangarajan, however, said that pressure on the price front is likely to remain in the short-term before moderating to around 7 per cent by March, 2012.
“Inflation will continue to remain high in the next three months. However, in the last quarter of the current fiscal (January-March, 2012), I see definite signs of decline. It will come down to 7 per cent by March, 2012,” he said.
In its mid-quarterly policy review, RBI said the monetary stance will be “influenced by signs of downward movement in the inflation trajectory...”
Economists said the RBI has decided to stick to its hawkish monetary policy, as inflationary pressure persists across all segments.
“The increase in the repo rate by 25 basis points is largely in line with the market expectations. The RBI has chosen inflation control as its main focus... Inflation remains generalised across food, non-food manufacturing and imported inflation,” Kotak Mahindra Old Mutual Life Insurance Chief Investment Officer Sudhakar Shanbhag said.
The RBI said there is still an element of suppressed inflation in the Indian economy, as there is a substantial gap between global oil prices and the highly subsidised domestic rates.
According to the central bank, a premature change in the policy stance could harden inflationary expectations, thereby diluting the impact of past policy actions.
“If you see the tone of the RBI, this rate hike was expected. Going ahead, another rate hike is also likely on the back of current inflation numbers,” Crisil Chief Economist D K Joshi said. PTI
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