Describing the Reserve Bank of India’s decision to raise key interest rates as the “right move”, the Planning Commission has said the tight monetary policy will not hurt growth, which is projected at 8.25 per cent to 8.5 per cent for the current fiscal.
“I think it is certainly the right move (of RBI) to contain inflation. This is a widely expected move,” the Planning Commission Deputy Chairman, Mr Montek Singh Ahluwalia, told reporters here today.
“I don’t think it will impact economic growth. I have already said it would not be 9 per cent this fiscal. It would be in the range of 8.25 to 8.5 per cent, 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 per cent, the borrowing rate has been hiked to 6.5 per cent.
Inflation stood at over 9 per cent in May, much above the central bank’s comfort level of 5-6 per cent.
On the concerns expressed by RBI in its mid-quarter review over rising prices, Mr 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 hike in short-term borrowing and lending rates on economic growth, with credit becoming dearer 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 per cent this fiscal to 8.25-8.5 per cent, he said: “The reason for lowering economic (growth) projection is that farm output growth would not be as high this fiscal as 6.6 per cent which was recorded in 2010-11.”
The country registered an economic growth rate of 8.6 per cent last fiscal mainly due to a smart recovery in farm output which stood at 6.6 per cent.