RBI’s rate hike may not be the last increase for now: FM

Industry and loan seekers are less likely to get relief from the non-stop hike of key policy rates by the Reserve Bank of India (RBI). A day after RBI hiked its key interest rates to control inflation; Finance Minister Pranab Mukherjee indicated that this may not be the last increase for now. He said, “I don't think it is end of the tunnel. It is not like that. It does not happen (that way)”.

The headline inflation measured by wholesale price index (WPI) is hovering around double digit mark from last few months. For the month of June it stood at 9.44% and for month of April and May it was 9.74% and 9.06% respectively. Accepting that the inflation at 9.4% in June was ‘reasonably high and unacceptable’, Mukherjee said it was a global phenomenon and the whole world was reeling under the impact of rising prices of fuel and other commodities.

Finance minister said, the government and the central bank are taking steps to check price rise, adding further he said, 'I am optimistic that measures taken by the RBI by adjusting the crucial rate will have impact and inflation will come down'. The last hike 50 basis points of RBI didn’t surprised finance minster, he said, 'I cannot say it surprised me. It is substantial no doubt, but given the situation it was necessary'.

On July 26, RBI increased its key policy rates for 11th time since March 2010, in order to bring inflation back to its comfort zone, however, RBI has been failed to do so by increasing its key policy rates. On the other hand, these non-stop hikes in interest rates have affected the investment rate and economic growth at large.

The increased interest rate is expected to have negative impact on the demand for fresh credit. Interest rate sensitive sectors like auto, home can experience moderation. Decision of fresh investments by the corporates is expected to be delayed as cost of capital will be increasing after the interest rate hike. Many banks have indicated that they would be passing the burden of increased interest rates, by increasing interest rates on deposits.

Finance minster expects headline inflation to come down to below 6 - 7% by March 2012, he said, 'We are fighting against inflation...increase in repo and reverse repo by the RBI Tuesday conveys a strong signal... (but) we shall have to keep in mind that year-end inflation may not be less than 6-7%.' In the Q1 monetary policy review RBI increased the inflation projects for March 2012 to 7% from 6%.

Commenting on the current economic situation, finance minister said 'you cannot have a carpet under which you can keep all these things and at the same time things will remain stable'. Pranab Mukherjee also reminded that India had lived with very high inflation, at 24% in 1974. It was 18% in 1990. He also said that he would take up the issue of volatility in commodity and crude prices at the international fora including G-20.