RBI gets finmin thumbs up

Written by fe Bureaus | New Delhi | Updated: Jul 28 2010, 09:40am hrs
The finance ministry on Tuesday came out in support of the Reserve Bank of Indias (RBI) move to raise key policy rates. The ministry feels the step will ease inflation and keep the growth of Indian economy on track.

I expect this policy to ease inflation further, which is already going down, and it should also keep us fully on track in terms of growth, finance ministry Pranab Mukherjee said.

The apex bank raised interest rates a tad more than expected, a measure to tame the inflationary pressure. The RBI raised its repo rate by 25 basis points, to 5.75%, and reverse repo by 50 basis points, to 4.50%, to absorb excess cash from the system. Economists and investors had expected a 25-basis point increase in both rates.

The RBIs policy moves took place at a time when double digit inflation, a serious concern for the economy, has led to bandhs, street protests and the Opposition demanding a vote in Parliament against the government on high prices.

Mukherjee, commenting on RBIs policy stance, said the move to narrow down the spread between the repo and reverse repo rates by 25 basis points shall make for a more efficient financial system. While Planning Commission deputy chairman Montek Singh Ahluwalia said the move will not adversely affect the real economy, finance secretary Ashok Chawla feels the move will anchor inflation without affecting growth.

The gradual incremental approach of RBI in terms of calibrating the repo and reverse repo rate will serve the purpose of continuing the growth momentum as also sending the signals for anchoring the inflationary expectations, the finance minister said.

On whether there will be liquidity crunch in the system, Chawla said, I dont think so. If there is some marginal problem for some time, which is very unlikely, RBI has enough tools. He added the credit growth, expected to be 20% this financial year, will further provide boost to the industry.

The central bank also cautioned government that it should not be complacent about fiscal consolidation just because it got one-off high realisation from the sale of spectrum for high speed mobile and broadband services. Spectrum auctions in the telecom segment has fetched the government Rs 1,06,000 crore, as against a budgeted amount of Rs 35,000 crore, resulting in an increase in receipts. The Centres fiscal deficit targets were all disturbed after the government provided stimulus to the economy since late 2008 to fight the impact of global financial crisis. Fiscal deficit during 2008-09 crossed 6% and over 6.5 % during 2009-10.

However, this financial year the government resorted to fiscal consolidation by partially withdrawing the stimulus packages. The government estimates fiscal deficit at 5.5% this financial year. If other things remain same, higher receipts from spectrum sale itself will help the government reduce fiscal deficit by at least one percentage point.