Police rates hiked to tame inflation: RBI

August 12th, 2011 - 7:17 pm ICT by IANS  

New Delhi, Aug 12 (IANS) Inflation would have spiralled out of control had the Reserve Bank of India (RBI) not adopted an aggressive monetary tightening policy and hiked the key policy rates consistently, the central bank’s deputy governor Subir Gokarn said Friday.

“Even if inflation is caused by factors like crude oil, food or other bottlenecks in the economy, the fact is that if left unchecked it will spiral,” Gokarn said at an event organised by the Confederation of Indian Industry here.

He said keeping inflation low was “critically important”. So the central bank had given priority to controlling inflation over maintaining growth.

“There may be a short-term trade-off. Growth will be slower as a result of tight monetary policy. But I don’t think there is a question of any long-term trade-off,” Gokarn said.

The RBI has hiked its policy rates 11 times since March 2010 to curb inflation.

In its monetary policy review last month, the RBI hiked key policy rates by 50 basis points.

The repurchase rate, the interest the central bank levies on short-term borrowing by commercial banks, has been hiked to 8 percent from 7.5 percent and reverse repurchase rate, or interest paid on short-term lending, raised to 7 percent from 6.5 percent.

Despite 11 consecutive rate hikes, inflation has remained stubbornly high at almost near double-digit, much above the central bank’s comfort level of 4-5 percent.

The headline inflation based on wholesale prices rose to 9.44 percent in June. It was almost in the double-digit in most part of last fiscal and stood in the range of 9 to 10 percent in the first three months of 2011-12.

Food inflation rose to 9.9 percent for the week ended July 30, according to official data released Thursday.

Gokarn said keeping inflation low is an important mandate of the RBI, and it was doing all it could to bring it down to a more comfortable level.

Gokarn did not rule out another rate hike saying the policy would be decided taking into consideration various issues, including industrial output growth, corporate earnings, liquidity and movements in price level.

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