PMEAC chairman defends rate hike

Defending the Reserve Bank's decision to hike key rates by 25 basis points, the Prime Minister's Economic Advisory Council on Friday 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," said PMEAC Chairman C Rangarajan.

Concerned over high inflation, the Reserve Bank on Friday 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," said Kotak Mahindra Old Mutual Life Insurance Chief Investment Officer Sudhakar Shanbhag.

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," said Crisil Chief Economist D K Joshi.