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Raising key rates to help contain inflation: Montek

Last Updated: Tuesday, May 3, 2011 - 15:34

New Delhi: Planning Commission 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," Planning Commission Deputy Chairman Montek Singh Ahluwalia said.

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 Tuesday, RBI has raised its repo (lending) and reverse repo (borrowing) rates by 50 basis points to 7.25 percent and 6.25 percent respectively. Besides it has also increased the saving interest rate from 3.5 to 4 percent.
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 percent, much above the RBI`s comfort level of 5-6 percent.

About RBI pegging economic growth at 8 percent in 2011-12, Ahluwalia said, "We have not produced Planning Commission estimate, but lowering the economic growth rate from 9 percent is quite sensible thing to do".

"I would hope that we would do better than 8 percent (in 2011-12). We had ourself felt that 9 percent (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.

Ahluwalia also applauded the Central Banks`s decision to raise saving interest rate from 3.5 to 4 percent and said that it could also be decontrolled.


First Published: Tuesday, May 3, 2011 - 15:34

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