RBI rate hike ‘right move’, says Montek

RBI rate hike ‘right move’, says Montek

New Delhi: Describing the decision of the Reserve Bank of India (RBI) to raise key interest rates as the “right move", the Planning Commission on Thursday said the tight monetary policy will not hurt growth, which is projected at 8.25% to 8.5% for the current fiscal.

“I think it is certainly the right move (of RBI) to contain inflation. This is a widely expected move," Planning Commission deputy chairman Montek Singh Ahluwalia told reporters here.

“I don’t think it will impact economic growth. I have already said it would not be 9% this fiscal. It would be in the range of 8.25 to 8.5%, which is a reasonable thing to plan for," he said.

Continuing with its efforts to contain inflation, the central bank raised key short-term lending and borrowing rates by 25 basis points each today for the 10th time since March, 2010.

While the short-term lending (repo) rate has been raised to 7.5%, the borrowing rate has been hiked to 6.5%.

Inflation stood at over 9% in May, much above the central bank’s comfort level of 5-6%.

On the concerns expressed by the RBI in its mid-quarter review over rising prices, Ahluwalia said, “Inflation remains in the worrying area. Therefore, it is entirely right that both the monetary and fiscal policy should be supportive of containing inflation."

About the impact of the RBI hiking short-term borrowing and lending rates on economic growth, with credit becoming dear for industry and other consumers, he said, “Keeping these (short term) rates low would not help as the long-term interest rates would go up due to inflation."

Elaborating on the reasons for lowering the growth target from 9% this fiscal to 8.25-8.50%, he said, “The reason for lowering economic (growth) projection is that farm output growth would not be as high this fiscal as 6.6%, which was recorded in 2010-11."

The country registered an economic growth rate of 8.6% last fiscal mainly due to a smart recovery in farm output, which stood at 6.6%.