Planning Commission on Tuesday endorsed RBI’s hawkish policy of hiking key rates by half a percentage point saying this would contain inflation.
“Both (raising key and saving interest rates) are very good decisions. All over the world the resurgence of inflation is a matter of concern,” said Mr Montek Singh Ahluwalia, Deputy Chairman, Planning Commission.
Mr Ahluwalia said, “When inflation goes up, it is sensible to take steps early to contain inflation. I am very glad that RBI has given a clear signal going beyond the usual 25 basis point (revision) to something more substantial.”
In its annual credit and monetary policy unveiled today, RBI has raised its repo (lending) and reverse repo (borrowing) rates by 50 basis points to 7.25 per cent and 6.25 per cent respectively. Besides it has also increased the saving interest rate from 3.5 to 4 per cent.
These steps have been taken by the RBI amidst a situation where prices have been shooting through the roof. The current inflation is hovering around 9 per cent, much above the RBI’s comfort level of 5-6 per cent.
About RBI pegging economic growth at 8 per cent in 2011-12, Mr 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 would hope that we would do better than 8 per cent (in 2011—12). We had ourselves felt that 9 per cent (GDP growth rate) that was originally projected may need to be revised,” he said.
Rejecting the theory that tinkering with short term key interest rates would hamper economic growth, he said, “It is false to argue that efforts to contain inflation are going to be negative on growth.”
“If you let inflation out of control, growth will be seriously destabilised, because expectations of inflation will raise the long term interest rates,” he added.