The Reserve Bank of India (RBI) Governor Raghuram Rajan has stated that high interest rate structure may be painful in the short run but will help in long run by containing inflation. The governor comment comes after the retail inflation rose more than expected at 7.96% in July as compared to 29 months low of 7.31% in June.The RBI considers price stability an essential condition for economic revival and aims to bring down retail inflation to 6% by January 2016.
The RBI Governor has been criticized for keeping the interest rates at high level for long. Raghuram Rajan explained that owing to the bottlenecks on supply sides, the RBI is seeking to keep some control over the demand side by keeping the interest rates high.
The RBI, with an aim to generate long term growth by bringing down inflation over a reasonable period of time, has raised repo rate three times to 8% since September’13 to tame price rise through cooling demand. The RBI is unlikely to cut key policy rates in next monetary policy review amid concerns that retail inflation could rise again due to pass-through of administered price increases, continuing uncertainty over monsoon conditions and their impact on food production, possibly higher oil prices stemming from geo-political concerns and exchange rate movement.
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