RBI policy review: After repo rate hike, Raghuram Rajan says prefers to fight price rise

Jan 28 2014, 21:09 IST
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RBI policy review leads to 25 bps repo rate hike, Raghuram Rajan says inflation has to be brought down to sustain economic growth in medium term. (AP) RBI policy review leads to 25 bps repo rate hike, Raghuram Rajan says inflation has to be brought down to sustain economic growth in medium term. (AP)
SummaryRBI policy review effects repo rate hike, Raghuram Rajan says inflation fight tops growth fears.

Reserve Bank of India (RBI) Governor Raghuram Rajan today said the 25 bps repo rate hike will help rein in consumer price rise at under 8 per cent by next January and denied speculation that the goalposts have been shifted to retail inflation and inflation targeting has been adopted.

"We should be able to reach the 8 per cent objective (on consumer price inflation) by the end of the year with this rate hike, which in turn will aid sustainable growth in the long term," Rajan told reporters at the customary post-policy interaction.

The Urjit Patel Committee on monetary policy framework set a retail inflation target of 8 per cent by January 2015. The panel's recommendations include shifting the goalposts to consumer price inflation and inflation targeting.

Rajan, however, denied that the RBI has adopted any of the suggestions formally and said it will have to be done in consultation with the government. He added that CPI inflation at 8 per cent is a very "reasonable" target.

"It is premature to say that we are moving towards inflation targeting," he said, adding the committee's recommendations are being studied.

He said the RBI had been focusing on both the consumer price index (CPI) and wholesale price index (WPI) inflation numbers for some time now and feels the CPI component is important because of its direct correlation with the consumer, who is getting affected the most and needs to be protected.

Rajan said the RBI has to focus on disinflationary pressures in a weak economy.

"The 25 bps increase in the repo is needed to set the economy securely on the recommended disinflationary path," Rajan said.

On the potential impact of the rate hike on growth, Rajan said the RBI is cognizant of the weak state of the economy and added that the rate hike would not result in a spike in lending rates by banks.

"We need to create an environment for the recovery to be strong, inflation is a part of that. I'm not in any way giving up on growth in coming months or quarters and that RBI is cognisant of the weak state of economy.

"So, the best way to sustain growth over medium-term is to bring down inflation to a tolerable level during the course of the year which will give us more room to take policy action later on that will help growth," Rajan said.

The RBI's baseline projections

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