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Monetary steps also needed to tame inflation: PMEAC

The Prime Minister's economic adviser, C Rangarajan, wants the Reserve Bank to remove excess money from the system to check rising prices as food inflation neared the decade's high of 20 per cent.

business Updated: Jan 03, 2010 12:18 IST

The Prime Minister's economic adviser, C Rangarajan, wants the Reserve Bank to remove excess money from the system to check rising prices as food inflation neared the decade's high of 20 per cent.

"We need to see that liquidity does not put inflationary pressures and for that some action on the monetary front would also be required," said Rangarajan, Chairman of the Prime Minister's Economic Advisory Council (PMEAC) and a former Governor of the Reserve Bank India.

The RBI, which is slated to announce review of the monetary policy on January 29, can raise the key ratios and rates to suck out liquidity from the system for checking inflation by curbing demand.

"While the government needs to work on the supply side, steps are also needed on the aggregate demand side," he said, attributing the rising inflation to supply constraints and high demand.

Following the global financial meltdown, the RBI had released liquidity by lowering key rates and ratios like Cash Reserve Ratio (CRR), Statutory Liquidity Ratio (SLR), repo and reverse-repo rates.

In its review in October, the RBI had raised the SLR, the portion of funds that banks invest in government securities, from 24 to 25 per cent, signalling the start of a retreat from the easy money policy.

The annual wholesale inflation rose to 4.78 per cent in November from 1.34 per cent in October and is expected by the RBI to touch 6.5 per cent by March-end.

The central bank had earlier projected inflation at 5 per cent by the end of the fiscal.

Food prices have been relentlessly rising over the last few months, jacking up food inflation to a decade-high of nearly 20 per cent in December. This has raised fears of a broader inflation and, thereon, higher interest rates.

"By March 2010, inflation is likely to grow a little over 7 per cent. We really need to check food inflation otherwise it may result in generalised inflation," Rangarajan said.

And to check food inflation, which he says is mainly "a supply side problem", the government has agreed to import food items that are in short supply due to a bad monsoon last year.

Expressing concern over rising prices, Finance Minister Pranab Mukherjee recently said that liquidity was not contributing to inflation.

"I had a detailed discussion with the RBI and found that there is no reason to believe that excess liquidity is contributing to inflation in the economy," Mukherjee had said, talking to reporters in Kolkata.