Supporting Reserve Bank’s hawkish stance on monetary policy, Finance Minister Pranab Mukherjee on Tuesday said the increase in the key rates was necessary to contain inflation.
“This (rate hike) was necessary to contain inflation. Inflationary pressure in the economy is still very high,” Mr. Mukherjee told reporters after the RBI announced its annual monetary policy for 2011-12.
The central bank increased the repo rate (short term lending rate) by 50 basis points to 7.25 per cent to rein in inflation, which was almost 9 per cent in March. It is a signal for banks to tighten interest rates.
RBI has pegged the year-end inflation at 6 per cent but cautioned that for the first half of the fiscal 2011-12, the rate of price rise would be in the range of 9 per cent.
The Finance Minister said monetary policy tightening was required “to contain inflation in the context of the volatility of commodity prices, including energy prices and food prices in the international market“.
On the issue of growth-inflation tradeoff, RBI Governor D. Subbarao said “high and persistent inflation undermines growth by creating uncertainty for investors and driving up inflation expectations“.
Agreeing with Dr. Subbarao, Mr. Mukherjee said the economic growth for the current fiscal would be influenced by international commodity prices and monsoon rains.
“It would depend upon the energy prices and on the behaviour of good monsoon....we are hoping that there will be good monsoon,” the finance minister said.
On the rising crude oil prices in the backdrop of political upheavals in Middle East and North Africa, Mr. Mukherjee said “that uncertainty is still there”.
RBIs’ GDP projection is lower at 8 per cent for the current fiscal. The Government had pegged it at 9 per cent.