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RBI policy measures won't rein in inflation: Montek Singh

The Planning Commission on Thursday said there was no co-relation between key policy rates that the apex bank has raised and inflation.

Sep 16, 2010, 09.39 PM IST
NEW DELHI: As if making light of the RBI's credit policy measures to rein in price line, the Planning Commission today said there was no co-relation between the key policy rates that the apex bank has raised and inflation.

On the contrary, the Deputy Chairman of the Plan body Montek Singh Ahluwalia said, inflation will moderate because of good foodgrain output and not on account of RBI's higher repo (lending) and reverse repo (borrowing), announced earlier in the day.

Suggesting that instead of the present system of monetary review, RBI should take fortnightly position and change policy rates every two weeks to handle the situation better.

"The notion that by raising some 25 basis points (of key rates), you will bring down the inflation... is wrong.

"If you see the graph of inflation and repo rate, there is no correlation between both. I don't believe that by doing little more (hiking interest rate)... they (rates) could have much of effect on inflation," Ahluwalia said, when asked whether the rate hike would help tame inflation.

On the other hand, he added, it was good monsoon and prospects of robust foodgrain output which would have a sobering impact on inflation, which was in double digits in July.

"The real expectation of inflation coming down is because the (agriculture) production...(it) is going to be very good in coming months," Ahluwalia said.

"The Kharif (summer crop) would be very good and because of good monsoon there are good prospects of Rabi (winter crop). I have no doubt that the agriculture prices would soften which were hardened last year," he added.

The Reserve Bank today raised its short-term (repo) lending and borrowing (reverse repo) rates by 25 and 50 basis points to 6 per cent and 5 per cent respectively to tame inflation. According to the revised Wholesale Price Index (WPI), it was 8.5 per cent in August.

Ahluwalia, however, opined that there was no correlation between RBI's key policy rates and inflation.

On the likely impact of high global prices of wheat, he said, there are enough stocks in the country. "The export of the grain is not allowed. In that situation, I don't see much impact of high wheat prices," he added.

Finance Minister Pranab Mukherjee had expressed concern about rising global prices of wheat and shortfall in output in countries like Russia and Ukraine.

On the adverse impact of rate hike on economic growth as is being feared by the industry, Ahluwalia said, "I don't think so. The structured interest rate can affect investment. But marginal adjustment in the short term, do not necessarily affect investments."

About any change in inflation forecast of 6 per cent by December under newly introduced series, he said, "I am not actually changing that. I remain of the view that inflation would be around 6 per cent by December."

Ahluwalia favoured allowing RBI to take short term monetary measures after every fortnight. He said, "Every two weeks the RBI should take a should be free to change policy interest rates."

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