FM wants balanced approach on rates

FM wants balanced approach on rates

Mumbai: Union finance minister called on Friday for a balanced approach on interest rates to support both growth and contain inflation, following Reserve Bank of India (RBI) comments on the need to wind back some of its extraordinary policy easing.

Pranab Mukherjee also said he expected annual economic growth to pick up from the October to December quarter.

“We shall have to attain growth at the same time not with the runaway inflation. Inflationary pressure also needs to be restrained," Mukherjee told the ET Now channel on Friday.

Inflation has been forced higher by high food prices, despite an unexpected dip in late September, and is expected to keep climbing in the months ahead. That leaves the central bank with a policy dilemma of needing to contain price pressures without undermining an economic recovery.

The country’s chief statistician warned against overreacting to economic data, which would appear strong in coming months.

Pronad Sen said annual changes in industrial production and inflation were being distorted by low 2008 figures, and month-on-month changes were a better guide to judge the state of the economy.

“We should be careful and should not overreact and go for contractionary policies," he said.

He said annual growth in industrial output would be in double-digits and the inflation rate may cross the central bank’s comfort zone by December.

In July, the central bank forecast inflation would be around 5% by the end of the fiscal year in March, although it has since said inflation would likely be higher than this. Some analysts see it going as high as 8%.

On Monday, RBI governor Duvvuri Subbarao said there was broad agreement India needed to wind back some of its easy policy stance but there were risks if the move was mistimed.

Nevertheless, India would exits its accommodative monetary policy before advanced economies, he said.

The comments and an Australian central bank rate rise on Tuesday sparked speculation in Indian markets that some of the massive stimulus steps taken to shore up the economy against the global slowdown might soon be withdrawn.

That pushed up swap rates to 2009 highs on Wednesday, although they eased after Mukherjee said India needed more time before deciding on an exit from accommodative policy.

Earlier on Friday, Mukherjee said there had been a steady expansion in domestic demand and savings and investment rates had picked up.

India’s economic growth slowed to 6.7% in 2008-09 from rates of 9% or more in the previous three years as the global downturn hit harder than expected, and growth is expected to slow towards 6% in 2009-10.