Agreeing with the Reserve Bank of India's (RBI) move to raise interest rates, the Prime Minister's Economic Advisory Council (PMEAC) on Thursday said persistently high inflation warranted policy action by the central bank.
"I think the Reserve Bank 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," PMEAC Chairman C Rangarajan told a private news channel.
The central bank has raised the key lending (repo) and borrowing (reverse repo) rates by 25 basis points each to tackle price rise.
RBI, Rangarajan said, would continue its tight monetary policy stance so long as inflation remains at an elevated level.
"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.
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The PMEAC Chairman and former RBI Governor also said higher interest rates will have an impact on companies' investments, as the cost of capital will increase.
"The hike in the interest rates will have some impact in terms of postponing the investments. But if inflation continues to remain at a high level, it will have a dampening effect on growth in the medium term," he said.
Rangarajan, however, exuded confidence the economy will grow by 8.5 per cent in the current financial year, driven by robust investments.
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"I think there are many factors that are operating in the economy which will propel the economy to grow at 8.5 per cent. While new investments may be slow in coming, the existing investments in the pipeline will be completed," he said.
Headline inflation in May stood at 9.06 per cent, despite the Reserve Bank's efforts to tackle price rise by continuously raising the key lending and borrowing rates.
What is more, food inflation was recorded at 8.96 per cent for the week ended June 4.
Food inflation, Rangarajan hoped, would moderate in the coming months on the back of a good monsoon.