RBI should avoid aggressive tightening: Ashok Chawla

RELATED NEWS RBI to allow takeout financing via external loans RBI to eye inflation causes to decide policy RBI likely to raise rates by 25 bps next week

The Reserve Bank of India (RBI) should not aggressively tighten monetary policy and risk denting economic growth, the finance secretary Ashok Chawla said in an interview on television channel on Thursday.

"If there is oversupply of money, it has necessarily to be handled by monetary policy instruments. But if there are other factors which are contributing to rise in prices or inflation, then it may not be a very useful tool," Ashok Chawla said.

"And using it in an aggressive manner would hamper and spoil growth, without actually helping on the inflation front."

The RBI is widely expected to raise key interest rates by 25 basis points next Tuesday when it reviews policy, which would be its second increase this month and take the total rise to 1 percentage point since mid-March.

Chawla's comments reiterate the government's view the RBI should look at factors fuelling inflation while deciding its monetary stance.

On Tuesday, Cabinet Secretary K.M. Chandrasekhar, the country's top civil servant, had said the RBI should take a call whether inflation was being fueled by excessive liquidity or supply constraints.

Annual headline inflation stayed above 10% for the fifth straight month in June, cementing expectations the central bank will continue with its calibrated tightening.

"I cannot comment on status quo or not, but what I am saying is, it's probably not the time to be very aggressive one way or the other, and the incrementalist and gradual approach which RBI is adopting, is the right way to go," Chawla said.

Inflation was initially fueled by high food prices following last year's poor summer harvest. But a pick-up in non-food prices suggests inflation is becoming a demand-driven phenomenon, which the central bank cited for its off-cycle rate hike in early July.

Some analysts have pegged capacity constraints in the rapidly expanding economy as the main reason for a surge in non-food inflation, pointing out a slowdown in May industrial output, despite robust domestic consumer demand.

Further, expansion in the M3 money supply , the broadest measure of liquidity in the system, has just picked up after slowing down since the year began and lags credit expansion .