Rate hike not best option to curb inflation, can hurt recovery, says FM

She said not accounting for supply-side factors and focusing only on increasing interest rates “will not give a complete solution for inflation”. “…most economies do have this problem because I think, for want of a better word, obsession with using interest rate as the only tool to deal with inflation, and not managing the supply side factors will not give a complete solution for inflation,” she said.

“The task for central banks is to keep in mind growth and growth-related priorities even as equally looking at controlling inflation,” the minister said.

The comments come after India’s retail inflation rate surged to a 15-month high in July. Also, the RBI Governor Shaktikanta Das, in the minutes of the Monetary Policy Committee (MPC) meeting held on August 8-10, had noted that supply side measures need to be continued to check spiralling of food shocks into generalised economy-wide price impulses. Although headline inflation has softened from last year’s elevated level, it still rules above the target, the governor said. “Our task is still not over,” he said.

In the latest policy review, the six-member Monetary Policy committee (MPC) unanimously decided to keep the policy repo rate unchanged at 6.5 per cent. The last repo rate hike of 25 basis points from 6.25 per cent to 6.5 per cent was in February 2023.

In her comments Friday, Sitharaman also listed out other priorities for sustaining economic recovery that include increasing investments to spur growth, climate change finance, raising investments in public health and education as well as diversification of supply chains. Reaffirming that India and the United Kingdom are close to signing a free trade agreement, Sitharaman said that a deal should be reached between the countries within this year. She also said that similar negotiations with Canada and EFTA countries (Liechtenstein, Norway, Iceland, and Switzerland) were progressing well, with a deal likely to be reached “sooner than later”.

This comes after UK Secretary of State for Business and Trade Kemi Badenoch on Thursday said the trade pact talks with India are in the final stages. She also said that India and the UK are “actively” discussing business mobility under the proposed FTA, and clarified that the overall visa liberalisation issues do not come under the ambit of trade pacts.

The Business 20 (B20) is the official G20 dialogue forum with the global business community. Established in 2010, B20 is among the most prominent engagement groups in G20, with companies and business organisations as participants.

Even as she said that there were concerns about the slowing growth rate of China, the government is not pitching India as an alternative because its neighbour is slowing down, but because of India’s independent strengths. “We are all concerned with the slowing down of China. India is showing strength in new age areas, for example hydrogen. I am more for presenting India for its strength,” the minister said. “India stands as an attractive destination for FDIs,” she said.