High commodity rates, pressure on inflation persists: Govt

Global commodity prices continue to remain high despite weak recovery in advanced countries and this has resulted in continuation of inflationary pressure India, Parliament was informed today.

"Despite the weak recovery in growth in the advanced economies, global commodity prices have not softened as much as one would have expected. As a result, supply side pressure on domestic inflation persists," Minister of State for Finance Namo Narain Meena said in a written reply to Rajya Sabha.

He said the government was keeping a watch on global economic situation to assess the possible spillover of economic downturn on the Indian economy.

The minister added that a moderate inflation is conducive to growth and investment activities.

His reply comes at a time when the government battling price rise. Headline inflation has been above 9% since December 2010 and stood at 9.22% in July this year.

Food inflation breached the double-digit mark, after a brief period of moderation, and stood at 10.05% for the week ended August 20.

The Reserve Bank has hiked interest rates 11 times since March, 2010 as part of its monetary tightening policy to tame inflation.

"The RBI's monetary policy stance is aimed at maintaining an interest rate environment that moderates inflation and anchors inflationary expectations," Meena said, adding that while cost of borrowing goes up with the increase in policy rates, lower levels of inflation would provide greater relief to the common man.

India Inc has complained that high interest rates have led to increase in costs of borrowings, thus hindering fresh investments which has led to a slowdown in industrial activity.

The country's GDP growth during the April-June quarter was 7.7%, the lowest in six quarters.

Meena said the government has taken action to provide succour to affected sectors on account of high interest rates.

"On an ongoing basis, government has also been providing interest subventions for key sectors of economy and sections of the society," the minister said.

In reply to another question, Meena said banks are not making any big profit due to frequent increases in interest rates on existing loans.

"Taking cues from the monetary tightening by RBI, banks have been increasing both their deposit and lending rates.

While the borrowers pay high interest rates when lending rates go up consequent upon hike of policy rates by RBI, the scheduled commercial banks also raise their deposit rates which have increased in the range of 250-500 basis points since March 2010 across all maturities."

"Therefore, higher lending rates do not necessarily mean higher profit for banks," Meena said.