Rate hike to consolidate long-term growth, says RBI Governor

RBI had tightened the repo and reverse repo rates by 25 basis points last week and raised the cash reserve ratio  (CRR) by 75 basis points (bps) in January. When questioned if the move was anti-growth, Subbarao stated that even if the growth in short-term get affected, the move was necessary to consolidate medium and long-term growth of the economy.

Briefing reporters here on Monday, Subbarao said, “In January we raised the CRR by 75 bps to suck out excess liquidity from the system while trying to manage the growth-inflation trade off. The situation has changed significantly in mid-March as growth has consolidated, as can be seen from the index of industrial production (IIP) figures of 16.7 per cent, the highest in 20 years. All sectors except consumer non-durables are doing quite well.” He then stated even though growth is good, inflation pressure is stronger than anticipated,  as can be seen from the fact that between November 2009 and January 2010, in a span of 3 months, the Wholesale Price Index (WPI) has gone up from 5.6 per cent to 9.9 per cent.. So, given these facts, some normalisation was required. He added that inflation might ease  in the coming months, subject to a good monsoon and stable oil prices.