RBI step to hike key rates in `right` direction: Montek

The Planning Commission on Thursday said the Reserve Bank has taken the "right" step in hiking key policy rates by 25 basis points as inflation is above the comfort level.

Updated: Mar 17, 2011, 15:58 PM IST

New Delhi: The Planning Commission on Thursday said the Reserve Bank has taken the "right" step in hiking key policy rates by 25 basis points as inflation is above the comfort level.

"I think it is on long expected lines. I don`t think markets would be surprised by (RBI key rate hike) given that inflation is not in the comfort level, I think it has done the right thing, " Planning Commission Deputy Chairman Montek Singh Ahluwalia told reporters here.

The central bank raised its short term lending and borrowing rates by 25 basis points each in a bid to contain inflation.

About RBI increasing its March-end inflation forecast to 8 percent from 7 percent, Ahluwalia said, "I don`t disagree with the (RBI`s revision of inflation) forecast of 8 percent inflation by March end."

He said, "We are hoping that it would go down to 7 percent level by March end. We have to admit that inflation rate in February is higher than what we wanted it to be." The overall inflation increased marginally in February to 8.31 percent from 8.23 percent a month ago.

"If the fiscal deficit projections presented in the budget are maintained and (with) gentle tightening of monetary policy, I assume (that) with a normal production year, inflation during 2011-12 will definitely below 7 percent," he said.

Dismissing the contention that RBI`s monetary tightening would hurt the economic growth, Ahluwalia said, "longer term economic growth rate is function of many things.

"I don`t agree with the view that in order to keep the long-term interest rate modest (lenders rates), you should keep the short-term interest rate (key policy rates of RBI) low," he added.

Ahluwalia suggested that it does not make sense to keep RBI policy rates at low level and let inflation rise, for ensuring cheaper long-term credit from lenders.

PTI