New Delhi: Union finance minister Pranab Mukherjee on Friday said a tight monetary policy over an extended period could impact the country’s economic growth momentum.
“Monetary policy has been gradually tightening. The monetary measures may end up moderating the growth rate if they have to be persisted (with) for an extended period of time,” he said while addressing a seminar organized by industry lobby Associated Chambers of Commerce and Industry of India, a day after a policy rate hike by the Reserve Bank of India (RBI).
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On Thursday, RBI raised the repo rate by 25 basis points to 7.5%, stressing that domestic inflation persists at uncomfortable levels. The central bank has increased policy rates 10 times in the last 15 months to contain inflationary expectations. A basis point is one-hundredth of a percentage point.
Provisional headline inflation rose to 9.06% in May while the final inflation figure for March was revised upwards to 9.68%.
Planning Commission member Narendra Jadhav, who was present on the occasion, concurred. “There would be some deceleration of economic growth on account of the adverse impact of increase in policy rates by RBI. Investment decisions may be postponed,” he said. Jadhav added that better price stability was needed to sustain the growth momentum in the medium term.
Mukherjee’s observations come at a time when some analysts have voiced concerns over RBI’s actions.
“RBI has to choose between sacrificing growth and killing growth for inflation now, and hence it should wait and watch more domestic and global data before taking further actions,” said Aneesh Srivastava, chief investment officer of IDBI Federal Life Insurance Co Ltd.
Standard Chartered Bank regional head of research Samiran Chakraborty said the finance minister’s statement is in line with RBI’s policy objective to soften domestic demand in order bring down the high level of inflation. However, Chakraborty does not feel the current high interest rate cycle may impact India’s medium-term growth prospects.
In its mid-quarter review of monetary policy on Thursday, RBI acknowledged that some short-run deceleration in growth may be unavoidable for bringing inflation under control. It maintained that going forward, its monetary policy stance will remain “firmly anti-inflationary”.
Analysts expect the policy rate to peak at 8%, with another two rounds of interest rate hikes in the year.
Chakraborty said it is difficult to predict how soon RBI may reverse its tight monetary policy stance. “It is difficult to draw a parallel with the 2008 scenario when RBI had to reverse its tight monetary policy stance due to the collapse of investment bank Lehman Brothers, which led to global financial turmoil,” he said.
Mukherjee, however, accepted that in the short run, the major challenge is to contain inflation, “which has implications of sustaining our growth momentum”.
“Inflationary pressures persist both from higher global commodity prices and domestic structural demand-supply imbalances. The management of inflationary pressure in the medium term is critically dependent on the improvement of supply responses,” he said.
However, Mukherjee said he remains hopeful that India may be able to achieve its growth target in the current fiscal. The government has projected a growth of 8.75% in gross domestic product in 2011-12. India’s economic growth was revised downwards to 8.5% in 2010-11 from the earlier projection of 8.6% by the Central Statistics Office, the apex statistical body.
“I am so far hopeful that we should be able to repeat the growth performance of 2010-11,” he said. Though there is some slowdown in industrial growth, partly due to the base effect, growth drivers of the economy remain broadly intact, he added.
RBI deputy governor K.C. Chakrabarty said industry will have to improve its productivity levels to bring down inflation.
“You all want inflation to come down. Neither the ministry of finance nor RBI has any magic wand to bring down inflation,” Chakrabarty said. “Inflation is supply-driven inflation. We have to control the cost of production of services. And that is possible only when industry adopts technology and brings down the cost of services.”
Asit Ranjan Mishra contributed to this story.