Union Finance Minister Pranab Mukherjee on Tuesday noted that the measures adopted by the Reserve Bank of India fit in well with the policies of the Finance Ministry which were aimed at controlling inflation and promoting sustainable growth.
“The hike in key policy rates should have a gentle impact in tightening money in the economy and should dampen further inflationary pressures. If nothing untoward happens on the weather front, my belief is that overall inflation has peaked and should be on downward trajectory from now on…My own belief based on analysis done in my Ministry is that inflation is now on downward trajectory and in 2010-11 will be less than 5.5 per cent and, in fact, [be] closer to four per cent with an upward bias,” he said.
In continuation of its gradual exit from the soft money policy that was put in place to combat the impact of the global financial crisis, the RBI raised the key short-term lending (repo) and borrowing (reverse repo) rates along with the cash reserve ratio (CRR) by 25 basis points each to suck out excess liquidity and thereby curb consumer spending so as to rein in inflation. The RBI projected the economy to grow 8 per cent this fiscal.
“The well balanced RBI measures reflect a mature and balanced view of the needs of our economy and I fully endorse the measures,” he said.
Economy back on track
The Minister maintained that the Indian economy had now bounced back with growth back on track even as inflation, although at a high level, was on a clear downward trend. “Hence, I believe that it is time to move back towards ‘neutral' policy rates, that is rates should prevail when an economy is stable and on track…This is an indication that there was a need to suck out excess liquidity from the system while leaving enough for industry,” Mr. Mukherjee said.
Alongside, Mr. Mukherjee also allayed apprehensions of the tight policy having any adverse impact on industrial growth.
“Our analysis of industrial growth and credit offtake suggests that there is no reason for such apprehension. In fact, these policies will aid sustainable growth…The overall economic scenario in India now looks extremely robust and better than it has any time in the last two years...It has been very well synchronised with fiscal policy and has played a major role in India's healthy recovery," he said.