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  3. Increased policy rates will not affect economic growth: Montek Singh Ahluwalia

Increased policy rates will not affect economic growth: Montek Singh Ahluwalia

17 Jun 2011 Evaluate

In the mid-quarter policy review, Reserve Bank of India (RBI) maintained its anti-inflationary stance and raised its key policy rates for the tenth time in row from March 2010. The planning commission says RBI’s hike in its policy rates by 25 basis points is the right move, and the tight monetary policy would not affect the growth which is estimated to be at 8.25 - 8.5% for the current financial year.

Montek Singh Ahluwalia said, “I think it is certainly the right move of RBI to contain inflation. This is a widely expected move. 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.” From March 2010, RBI has increased its key repo rate and reverse repo rate by 25 basis points each to bring inflation in its comfort zone, the headline inflation for May was 9.06% and in its midterm policy review, RBI has said the inflation figures for April and May could be revised upward.

On the anxiety expressed by central bank, Montek Singh 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.” This increase in the short term borrowing and lending rates will have adverse impact on the interest rate sensitive sectors like auto and real estate. On the impact of increase in key policy rates on economic growth, Montek Singh Ahluwalia said, “Keeping these (short-term) rates low would not help as the long-term interest rates would go up due to inflation.”

Explaining the reasons for the reducing the growth target from 9% this fiscal to 8.25 - 8.5% Ahluwalia 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.” Last year, Indian economy has achieved a healthy growth of 8.5% due to a smart recovery in farm production which stood at 6.6%.

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