RBI Under Pressure To Hike Interest Rates
Inflation have further moved up to a nine-month high to 5.11%, which will increase pressure on RBI for not lowering interest rates.
The wholesale price index touched 5.11% in the week ended March 1. In the previous week, the prices have gone up by 5.01%.
It is expected that inflation will further move up in the coming weeks. RBI governor YV Reddy had recently expressed his concern over rising food and energy prices.
Though the need of the hour is to allow the interest rates to fall to push economic growth, rising inflation is forcing the central bank to continue with the tighter monetary policy. So, RBI is in a fix regarding future course of policy on interest rates.
Considering slowdown in the economic growth, it was expected that RBI would allow interest rates to fall. But, a senior economist said as inflation has started looking up, RBI might take steps to tighten the money supply, leading to rise in the interest rates.
The continuous rise in the crude price and depreciation in rupee against dollar will also put upward pressure price. This will make RBI’s task even tougher.
FM P Chidambaram, who is facing a tough challenge to check the slowdown in economy, said the government accords ‘‘top most priority to controlling inflation’’ and ‘‘is prepared to take more steps,’’ to curb prices.’’
As the inflation hurts the poor the most, the government is determined to take tough measures to contain inflation. In fact, RBI had already said controlling inflation has a higher priority for the central bank than boosting economic growth. With election within a year, the present government can’t afford a high inflation scenario.
Chidambaram attributed the international and national factors for rise in inflation to over 5%. He said global prices of crude oil, palm oil and rice, which India imports, have been on the rise. And, this price rise in wheat, rice, edible oils and pulses contributed majorly in the inflation.
He added that the country can insulate itself against the increase in their international rates by becoming self sufficient in these items.
Internationally, commodity prices are rising, and it would not be easy to control inflation as long as India imports such items, Chidambaram said. He said interest rate is one of the effective instrument that can contain inflation. RBI should be trusted to use it as an instrument to bring price rise under control.
To contain inflation, RBI increased the benchmark interest rate in the economy. This made money costly and affected real estate and consumer durable sectors badly. As the demand is not growing, companies postponed their investment plans for expanding capacities. This led to slowdown in the capital goods sector also. In January, industrial production fell to 5.3% as against 11.3% a year back.