RBI’s move to increase a key short-term lending rate and order commercial banks to hold more in reserves will help the fight against inflation, but will contribute to the economic slowdown of recent months.
“The slowdown in demand for funds may help in controlling overall (consumption) demand and may help in bringing down prices,” said MV Nair, chairman and MD of Union Bank of India.
Inflation has grown on the back of rising global prices of food and commodities, especially crude oil. The government’s steps in recent months to boost supplies has had limited impact on runaway prices.
“The monetary policy has to urgently address aggregate demand pressures which appear to be strongly in evidence,” the RBI said in a statement.
A depreciating rupee has made imports costlier. The Indian rupee has lost more than 8 per cent against the US dollar so far this year.
“Exchange rate stability is important to keep inflation under check; so will be the trend in crude oil prices,” said Keki Mistry, MD of housing finance company HDFC Ltd.
“The RBI’s move is not going to bring down the current level of inflation. It is aimed at bringing under control future inflation, said DK Joshi, principal economist, CRISIL.