The Hindu : Business : Climate not conducive for cut in interest rates: Rangarajan

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Thursday, Mar 20, 2008
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Climate not conducive for cut in interest rates: Rangarajan

Special Correspondent

NEW DELHI: Prime Minister’s Economic Advisory Council (EAC) Chairman C. Rangarajan on Tuesday noted that with the rate of inflation inching slightly beyond the ‘comfort’ zone, the prevailing situation was not favourable for a reduction in interest rates.

In an interaction with newspersons here, Dr. Rangarajan said: “Inflation taken by itself is not favourable towards doing that [cutting interest rates)… When the inflation rate is rising, it is always critical to bring down the rates [of inflation], but the stand on interest rates is determined by a variety of factors. We would have liked the inflation rate to stay somewhere between four and five per cent, preferably at [the] four per cent level.”

With the rate of inflation, as measured by the Wholesale Price Index (WPI), pegged at 5.11 per cent for the week ended March 1, this was for the second successive week that the point-to-point inflation hovered over the five per cent mark while the RBI’s (Reserve Bank of India) objective has been to contain the average rate at five per cent for the current fiscal.

Soaring global prices

Pointing to the soaring global food prices as the reason for the current bout of inflation, Dr. Rangarajan noted that such a situation had also resulted in the Government not having the option of importing foodgrains to bring down domestic prices.

In such a scenario, he advocated the need for moderation in money supply and said: “We need to do both supply management as well as demand management.”

Meanwhile, the Finance Ministry has maintained that reining in inflation was high on the Government’s agenda in view of its adverse effect on the country’s economy and the weaker sections of the society.

Annual report

In its annual report 2007-08 released here, the Ministry said: “High inflation hurts the poor. Putting pressure on interest rates adversely affects both savings and investment. Thus, containment of inflation is high on government agenda”.

The report noted that among the anti-inflationary policy measures were strict fiscal and monetary discipline and rationalisation of excise and import duties on essential items to lighten the burden on the poor.

The Government, it said, was also taking steps for effective supply-demand management of sensitive items through liberal tariff and trade policies, apart from strengthening the public distribution system (PDS).

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