‘Hike in short-term lending rates will have negative impact only in the near-term'

Union Finance Minister Pranab Mukherjee has commended the Reserve Bank of India for its monetary tightening measures aimed at containing inflation even as he conceded that the hike in short-term lending and borrowing rates would have a negative impact on growth in the near-term.

In a statement here, Mr. Mukherjee noted that the apex bank had to take the decision at a difficult time of mixed economic signals of rising prices in the wake of slackening industrial growth and exuded confidence that taming inflation now would be good in the long run for higher economic growth.

“This tightening [hike in repo and reverse repo rates by 25 basis points] may have some negative impact on the growth rate, but I expect such an effect to be only a short one. In the medium to long-term, the changes announced by the RBI should actually help the Indian economy do better in terms of growth,” Mr. Mukherjee said.

Explaining why such a step was necessary, even at the expense of growth, he said: “Today is not such an easy time. The signals from the economy have been mixed. Industrial growth showed a slight slowing down in August. Inflation, while less than what it was some months ago, is still not in a zone where we can sit back…I respect this [RBI] decision made in a difficult time. This will create the monetary tightening in the country without narrowing the LAF [liquidity adjustment facility] corridor.”

Hailing the RBI for maintaining the difference between the two rates — known as the LAF corridor — unchanged at one per cent, Mr. Mukherjee said: “I am glad that the RBI has risen to the challenge and used a very careful combination of policies to complement what the government is doing to steer our economy to grow better and harness inflation.”

Earlier in the day, Finance Secretary Ashok Chawla termed the RBI step as a balancing act to tame inflation without hurting economic growth.

“This [RBI measure] should, as we go ahead further, anchor the inflationary expectations which in any case is now moderating from the earlier elevated level…This modest increase [in repo and reverse repo rates] is not likely to impact in any harmful manner the growth that we have been seeing in the recent past. So on the whole, in the macro economic policy parameter, it is an extremely sound and sensible decision,” Mr. Chawla said.

Planning Commission Deputy Chairman Montek Singh Ahluwalia said: “This adjustment [by RBI] is a good balance between responding to inflationary concerns, which is very important and at the same time not doing anything that would in a serious way disrupt growth”.

Mr. Ahluwalia also noted that inflation in future “would be in a comfortable zone” when the WPI data for December would be available in mid-January.

  • Taming inflation now would be good in the long run for higher economic growth: Pranab
  • Inflation in future “would be in a comfortable zone”: Montek Singh Ahluwalia