Has the Reserve Bank of India taken its war on inflation a bit too far? After the mid-quarter policy review on Friday, the finance ministry seemed to be asking this question ? almost. Reacting to the RBI?s decision of lifting the policy lending rate by a quarter per cent, finance minister Pranab Mukherjee highlighted that there were signs of growth being affected due to monetary tightening. He was alluding to the recent GDP data which said the economy expanded at 7.7% in April-June, the weakest pace in six quarters.
While there was no word from the central bank even on Friday whether its tightening cycle has peaked, chief economic advisor Kaushik Basu said he would vote for a pause on rate hikes in future. Basu said he had expressed reservation about the latest rate hike. This is in clear contrast to the RBI being tenacious on its path, and its declaration that it would be guided purely by the direction of inflation in the coming months.
On his part, Planning Commission deputy chairman Montek Singh Ahluwalia said Friday?s quarter per cent hike in policy rates was ?within a range that is not unreasonable?. The stoutest defence of the RBI?s step, among other key policymakers, came from C Rangarajan. ?The RBI has taken the correct decision. In the context of rising inflation, RBI had no other option but to raise interest rates,? Rangarajan, who chairs the prime minister?s economic advisory council, said.
In a statement, Mukherjee said: ?(I?m) hopeful that measure taken would get us back to a more comfortable inflation situation earlier rather than later, while leaving scope for growth to pick-up in the second half of the year.? Inflation continued to be a matter of concern at over 9% over the last 12 months, with significant supply-and demand-side factors contributing to it, he said.
Ahluwalia expressed optimism that inflation will come down in view of the softening of prices across the globe due to prevailing sluggishness in the economy and good harvest expected this year. ?I think on the supply side also good harvest will have positive effect. My guess is that the global transmission of inflation will also be much less. Taking all things together, I think, the inflation will moderate,? he added.
Headline inflation based on the wholesale price index had touched a 13-month high of 9.78% in August, with core inflation also rising a significant bit.
Rangarajan, also a former RBI governor, said that pressure on the price front is likely to remain in the short term before moderating to around 7% by March, 2012. ?Inflation will continue to remain high in the next three months. However, in the last quarter of the current fiscal (January-March, 2012), I see definite signs of decline,? he said.
The central bank said a premature change in the policy stance could harden inflationary expectations, thereby diluting the impact of past policy actions. Friday?s rate hike was the 12th in a series since March 2010.