Even as India Inc. expressed deep disappointment over the unexpectedly hefty 50 basis point hike in key policy rates, Finance Minister Pranab Mukherjee justified the Reserve Bank's step as a strong signal that will help in easing inflation to a comfortable level of 6-7 per cent by the fiscal year-end.

“The Reserve Bank of India has sought to give a strong signal to further moderate inflation and check inflationary expectations,” Mr. Mukherjee said in a statement.

With headline inflation stubbornly hovering at near double digits during the first quarter this fiscal, Mr. Mukherjee noted that the rate hike was necessary to bring down inflation to an acceptable level at the earliest. “With this policy adjustment, we will be able to get back to a more comfortable inflation situation that takes us to the year-end inflation level of six to seven per cent,” he said.

Mr. Mukherjee pointed out that in recent months, inflation had softened, particularly in the case of food articles, but owing to the hardening of non-food manufactured item prices, headline inflation continued to be around 9 per cent. Although this is consistent with the RBI assumption for the first half of 2011-12, “medium-term concerns on growth require that we bring it down…”

Notwithstanding some slowdown of GDP (gross domestic product) growth in the first quarter of 2011-12, as reflected in the some indicators including the IIP (Index of Industrial Production) and moderation in the growth of interest-sensitive sectors, “the overall GDP growth for 2011-12 so far is in line with the momentum attained in 2010-11,” Mr. Mukherjee said.

In its first quarterly policy review for 2011-12, the RBI acknowledged a moderation in growth but chose to maintain its previous projection of 8 per cent GDP growth for the fiscal year.

Industry's predicament

The steep rate hike came as a shock to India Inc., particularly when concern had been expressed over the possibility of moderation in economic growth on the back of a deceleration in factory output growth in April-May. Industrial output growth in April-May this year averaged 5.7 per cent, compared to 10.8 per cent in the same period last year.

Pointing to the industry's predicament in the wake of a slowdown, apex chamber CII said: “With 11 consecutive interest rate increases in the last 15 months, RBI has emerged as the most aggressive central bank which is tasked with containing inflation.” At a time when there were indications of a clear slowdown in industrial and economic output, “this 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,” it said.

Industry chamber FICCI also expressed ‘major disappointment' with the rate hike. “In the trade off between growth and inflation, the RBI has clearly decided to sacrifice economic growth,” it said.

Echoing similar sentiment, industry chamber Assocham said the hike in key policy would adversely impact the already falling growth momentum.

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