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Updated: September 17, 2011 11:42 IST

No other option for RBI, says Rangarajan

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Chairman of Economic Advisory Council to Prime Minister, C. Rangarajan addressing a press conference on “Economic Outlook –2011-12”, in New Delhi on Monday.
PTI
Chairman of Economic Advisory Council to Prime Minister, C. Rangarajan addressing a press conference on “Economic Outlook –2011-12”, in New Delhi on Monday.

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 remained at elevated levels.

“The RBI has taken the correct decision. In the context of rising inflation, the RBI had no other option but to raise interest rates,” PMEAC Chairman C. Rangarajan told PTI.

Concerned over high inflation, the RBI on Friday raised key interest rates by 25 basis points, its 12th such hike since March, 2010.

Following the increase, the short-term lending (repo) rate stands at 8.25 per cent and the short-term borrowing rate (reverse repo) is 7.25 per cent. The RBI, while announcing its mid-term review of the monetary policy, kept all other rates and ratios unchanged.

Inflation has been above the 9 per cent mark since December, 2010, and touched a 13-month high of 9.78 per cent in August this year.

Dr. Rangarajan, however, said that pressure on the price front was 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 had decided to stick to its hawkish monetary policy, as inflationary pressure persisted across all segments.

The RBI said there was still an element of suppressed inflation in the Indian economy, as there was 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.

Mr. Joshi said the economy was likely to grow at a lower rate than the 8 per cent projection made by the RBI earlier due to domestic and international factors.

Other economists concurred with Mr. Joshi's view regarding further monetary tightening.

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