The Reserve Bank of India has opted to put growth on the backburner while battling the hydra-headed monster of inflation, hiking policy rates as many as seven times since March 2010.
The central bank, however, expects that the inflation will cool down beginning the next financial year.
“Our challenge is really to restraint demand pressure in the short-term, but support supply responses,” RBI governor Duvvuri Subbarao said.
The unyielding price rise made things difficult, he said. “The dilemma really was how to balance the concern of growth and concerns of inflation,” Subbarao said.
According to him, Tuesday’s increase in policy rates was a necessary move at this juncture. “We recognise that if inflation is left to persist it will lead to a further rise (in inflation),” said governor, justifying the rate hike.
“Inflation will come down, we expect during 2011-12, but the pace of coming down will be slower than we expect,” he said.
He added that the monetary policy action will have an effect going forward.
Subbarao did concede that manipulating the monetary policy is not fullly effective in containing inflation, which is at present supply-side driven.
“It is true that inflation is driven by the supply side factors and for that monetary policy is not an effective response,” he said at the press conference here while announcing the quarterly monetary policy review.