Decision influenced by current price situation, high inflation might have weighed RBI’s decision making process, says FM
Geetanjali Minhas | June 18, 2012
Considering rising inflation and global economic uncertainty, in its mid-quarterly policy review on Monday, the reserve bank of India kept policy rates unchanged. The Cash Reserve Ratio (CRR) has also been kept unchanged at 4.75%.
The apex bank gave priority to checking inflation over growth, disappointing India Inc and retail borrowers who were expecting at least 0.25 percent rate cut. The RBI said, "reduction in the policy interest rate at this juncture, rather than supporting growth, could exacerbate inflationary pressure".
The Wholesale Price Index-based inflation had risen from 7.23% in April to 7.55% in May. Besides, retail inflation also moved up to 10.36% in May, from 10.32% in the previous month.
The RBI said the future action would depend upon on external factors, domestic developments and inflationary risks.
The bank’s action, according to finance minister Pranab Mukherjee, was influenced by the current price situation. "(High inflation)...might have weighed their (RBI's) decision making process...normally in mid-quarter review, it is not necessary for the governor to consult the minister," he said in New Delhi after the policy announcement.
Mukherjee had said on Saturday that he was expecting the RBI to "adjust" the monetary policy to fuel growth. “I am very confident that the RBI would adjust the monetary policy as we are adjusting the fiscal policy to counter slow growth, high fiscal, current account deficits, rising inflation and a slew of negative sentiments facing the economy," Mukherjee had said while delivering the inaugural address at a national seminar on banking, insurance and financial sector organised by the Associated Chambers of Commerce and Industry of India (ASSOCHAM) in Mumbai on Saturday.
The minister had said that like other countries, India, too, is concerned on developments in Greece with reference to challenges it is facing on being part of the currency union as the developments are also impacting value of rupee which has lost against dollar by about 20 percent in the past one year.
On concerns of rising fiscal deficit, the FM responded that the "government is taking steps and we know that if federal finances become weak, nobody will be able to bail out Indian economy”.
Reacting to global rating agency Standard & Poor’s warning that India’s credit rating may be downgraded to below investment grade, Mukherjee said that “as finance minister, I cannot ignore ground reality and apprehensions of Indian industry and the credit rating agencies” and added that “we have requested all the parties to lend their support and we do look forward to taking everyone on the board”.
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