Repo rate increase will curb inflation: Pranab, Montek

The finance ministry and the Planning Commission today said the RBI’s move to increase repo rate by 50 basis points would curb inflation, but the commerce and industry ministry said rise in interest rates should not hurt credit availability and hence industrial growth.

Finance Minister Pranab Mukherjee and Planning Commission Deputy Chairman Montek Singh Ahluwalia also had a different take on economic growth than RBI’s projections of it falling to 8 per cent this financial year from 8.6 per cent during 2010-11.

“This (rate increase) was necessary to contain inflation. Inflationary pressure in the economy is still very high,” the finance minister told reporters after the RBI announced its annual monetary policy for 2011-12. The finance minister said monetary policy tightening was required to contain inflation in the context of the volatility of commodity prices, including energy prices and food prices in the international market.

On whether the economic growth would moderate to 8 per cent as projected by RBI against the finance ministry’s projections of 9 per cent and last financial’s growth of 8.6 per cent, Mukherjee said, “it will depend on the energy prices and on the behaviour of good monsoon....We are hoping there will be good monsoon.”

Mukherjee said uncertainty was still there on oil prices front due to unrest in West Asia and North Africa.

However, Commerce and Industry Minister Anand Sharma said he had already raised the issue of high interest rates hurting industrial growth with the finance minister. “We will do it again if the need arises. However, it is too early to assess what the impact will be of today’s increase on sectors. I still maintain there shall not be any sharp escalation of rates and credit availability shall not be a problem for industrial growth,” he added.

Ahluwalia said, “Both (raising key and saving interest rates) are very good decisions. All over the world the resurgence of inflation is a matter of concern.”

He said it was sensible to take steps early to contain inflation, when the rate of price rise is going up. “I am very glad that RBI has given a clear signal going beyond the usual 25 basis point (revision) to something more substantial.”

About economic growth, Ahluwalia said, “We have not produced Planning Commission estimate, but lowering the economic growth rate from 9 per cent is quite sensible thing to do. I will hope we will do better than 8 per cent (in 2011-12).” The Planning Commission had revised its target of nine per cent growth a year on an average during XIth Five-Year Plan, the terminal year of which is this financial year, to 8.1 per cent.

However, Economic Affairs Secretary R Gopalan said economic growth might moderate if the current economic situation continues. Meanwhile, Chief Economic Advisor Kaushik Basu said India’s April headline inflation was expected to ease to 8.3 per cent. The number rose to 8.98 per cent in March from 8.31 per cent in the previous month.