On expected lines: Centre

“This (rate hike) was on the expected lines as the core inflation hardened (in May) ... RBI has sought to maintain an interest rate environment that moderates inflation and check inflationary expectations,” finance ministry said. Expressing concern on hardening of inflationary pressures, the ministry said bringing in price stability is paramount for sustaining high growth. “We need to have better price stability for sustaining growth in the medium term,” it said.

India aims to grow at 9-9.5 per cent in the next Five- Year Plan beginning April 2012. “...the headline numbers understate the pressures because fuel prices have yet to reflect global crude prices,” it added.  Agreeing with RBI’s move to raise interest rates, Prime Minister’s Economic Advisory Council (PMEAC) said persistently high inflation warranted policy action by the central bank. “I think RBI has taken the right decision. Contrary to expectations, the inflation rate in May went up and went up very considerably and therefore, it left RBI with no other option but to raise the policy rates,” Chairman C Rangarajan said.

“They have to keep the ammunition still in store for further action against inflation if it becomes necessary. I believe that RBI will continue to follow the policy of tightening so long as inflation remains at very high levels,” he said.

He said higher interest rates will have an impact on companies’ investments, as the cost of capital will increase.

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