"Monetary policy rate hikes seek to affect the macro economy through a compression in aggregate demand and are aimed at not only controlling inflationary pressure but also inflation expectations. There is, as such, no direct one-to-one correspondence between the quantum of increase in interest rates and reduction in the levels of inflation," he said.
Mukherjee said that as interest rate hikes push up costs of borrowing and, thereby, cost of products and services in general, a part of the costs in likely to be passed on to the consumers. "Higher end-product prices or end-service prices would help lower aggregate demand and arrest inflationary pressures emanating therefrom," he said.
Inflation has been above the 9 per cent-mark since December last year and stood at 9.73 per cent in October this year. The Reserve Bank has hiked lending rates 13 times by a total of 350 basis points since March, 2010, to curb demand to tame inflation. Mukherjee said that to lessen the burden of rising interest rates on the vulnerable sections, the government has been giving selective interest subvention in some areas.
"Besides, the government is also addressing supply side constraints through a slew of measures," he said. In reply to another question in the Rajya Sabha, the minister said that the unfolding sovereign debt crisis in the euro zone has impacted the country through slowdown in FII inflows, fall in equity markets, slowdown in industrial production, besides decline in the value of rupee and slowdown in exports during recent months.
"The government is keeping a close watch on the situation. The sub-committee of the Financial Stability and Development Council (FSDC) headed by the RBI Governor is also making continuous assessments in the matter," Mukherjee said. He said that the economic fundamentals of the country are strong on account of domestic demand driven growth, high saving and investment rates and a sound banking system.
"Calibrated approach to capital account convertibility has prevented surge and reversal of debt creating capital flows to a significant extent. Similarly, external commercial borrowings policy... has been successful in maintaining external debt at sustainable levels," Mukherjee said.