Even as the Reserve Bank of India (RBI) continued to increase interest rates in a bid to rein in high prices, inflation rate is likely to remain high till the middle of next year, Kaushik Basu, chief economic adviser to the PM, told a television channel. He said that the government does not have a "straight forward" and clear solution to tackle inflation.
RBI on Friday raised repo rate or the rate at which banks borrow from RBI by 25 basis points, the hike being the 12th in the last 18 months. While the annual rate of inflation for primary articles, with a weight of 22.02% in the WPI, increased to 9.94% for the week ended November 7. It was 9.16% in the previous week. Basu in an interview accepted that though there are differences between the finance ministry and the RBI on how to address the issue, it is not a cause for worry. RBI's constant increase of repo rate is likely to hurt growth.
Basu said the central bank must try reducing interest rates as Turkey and Brazil are doing. However, he said he was ‘reasonably confident’ about India's growth story. He said despite the present problems, the GDP will grow by 8.1%. He said that though the economy is facing short term problems the medium and long term forecast remains bright. He also said that these problems could be contained.
Mukherjee backs RBI
Meanwhile, finance minister Pranab Mukherjee justified the RBI’s decision to hike repo rate.
Addressing the media on the sidelines of meet of western region CMs and finance ministers and discus the priority sector lending in Mumbai, Mukherjee said: “Normally it (monetary policy) is formulated in consultation with the government, and fiscal policy and monetary policy go hand in hand”.
He added inflation is too uncomfortable to be left unattended and , “it is to be contained. And if the RBI considers it is necessary to adjust the crucial rates, they have done exactly so.”