No direct link between rate hike and inflation: Pranab

November 29th, 2011 - 6:16 pm ICT by IANS  

Pranab Mukherjee New Delhi, Nov 29 (IANS) With inflation remaining stubbornly near double digits in the last two years despite an aggressive monetary tightening policy by the Reserve Bank of India (RBI), Finance Minister Pranab Mukherjee Tuesday admitted that there was no direct link to prove that interest rate hikes helped ease price rise.

“There is, as such, no direct one-to-one correspondence between the quantum of increase in interest rates and reduction in the level of inflation,” Mukherjee said in written reply to a question in the Rajya Sabha.

The RBI has raised key policy rates five times in the current financial year and 13 times since the beginning of 2010 to control price rise. However, inflation has remained stubbornly high despite such aggressive monetary tightening.

The finance minister said the RBI’s move was aimed not only to control “inflationary pressures” but also “inflation expectations”.

“Monetary policy rate hikes seek to affect the macro economy through a compression in aggregate demand, aimed at not only controlling inflation pressures, but also inflation expectations,” Mukherjee said.

The headline inflation based on the wholesale price index was recorded at 9.73 percent in October. Food inflation was at 9.01 percent for the week ended Nov 12, according to the latest official data.

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