RBI rate hike correct as inflation high: Rangarajan

New Delhi: Defending the Reserve Bank's decision to hike key rates by 25 basis points, the Prime Minister's Economic Advisory Council (PMEAC) today said the central bank had no other option, as inflation remains at elevated levels.

"The RBI has taken the correct decision. In the context of rising inflation, RBI had no other option but to raise interest rates," PMEAC Chairman C Rangarajan said.

Concerned over high inflation, the Reserve Bank today raised key interest rates by 25 basis points, its 12th such hike since March, 2010.

Following the increase, the short-term lending (repo) rate stands at 8.25 per cent and the short-term borrowing rate (reverse repo) is 7.25 per cent.

The RBI, while announcing its mid-term review of the monetary policy, kept all other rates and ratios unchanged.

Inflation has been above the 9 per cent-mark since December, 2010, and touched a 13-month high of 9.78 per cent in August this year.

Rangarajan, however, said that pressure on the price front is likely to remain in the short-term before moderating to around 7 per cent by March, 2012.

"Inflation will continue to remain high in the next three months. However, in the last quarter of the current fiscal (January-March, 2012), I see definite signs of decline. It will come down to 7 per cent by March, 2012," he said.

In its mid-quarterly policy review, RBI said the monetary stance will be "influenced by signs of downward movement in the inflation trajectory..."

Economists said the RBI has decided to stick to its hawkish monetary policy, as inflationary pressure persists across all segments.

"The increase in the repo rate by 25 basis points is largely in line with the market expectations. The RBI has chosen inflation control as its main focus... Inflation remains generalised across food, non-food manufacturing and imported inflation," Kotak Mahindra Old Mutual Life Insurance Chief Investment Officer Sudhakar Shanbhag said.

The RBI said there is still an element of suppressed inflation in the Indian economy, as there is a substantial gap between global oil prices and the highly subsidised domestic rates.

According to the central bank, a premature change in the policy stance could harden inflationary expectations, thereby diluting the impact of past policy actions.

"If you see the tone of the RBI, this rate hike was expected. Going ahead, another rate hike is also likely on the back of current inflation numbers," Crisil Chief Economist D K Joshi said.

Joshi said the economy is likely to grow at a lower rate than the 8 per cent projection made by the RBI earlier due to domestic and international factors.

Other economists concurred with Joshi's view regarding further monetary tightening.

"Against the backdrop of the recent increase in petrol prices... It looks like headline inflation would not come down in the next few months. Therefore, it looks that there is a chance that the RBI may hike the rate again in the next meeting," SMC Investments and Advisors Chairman and Managing Director D K Aggarwal said.

Mape Securities Senior Director Kislay Kanth said the impact of the 12th rate hike since March, 2010, would be felt on the country's economic growth.

"A continuing large dose of rate increases can only hurt the costs of businesses even more and also affect demand for property, consumer discretionary such as automobiles and electronics making the financing costs in the system much higher," he said.

"Hence, the upside in the markets will stay capped, which are also vulnerable to global market volatility staying high," Kanth said.

India Inc has blamed the repeated rate hikes for hindering fresh investment and the slowdown in the economy, as there has been a sharp jump in the cost of borrowing.

The economic growth of the country moderated to 7.7 per cent in April-June, the lowest in six quarters. Industrial production also plunged to a 21-month low of 3.3 per cent in July.

Source: Financial Express