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One more round of rate hike needed to tame inflation: PMEAC

business Updated: Oct 15, 2010 16:53 IST
Reserve Bank of India

The Reserve Bank may need to raise policy rates yet again to tame the "uncomfortably" high inflation of 8.6 per cent, feels Prime Minister's economic adviser C Rangarajan.

The RBI has raised key policy rates five times so far this year, but there has been no signs of inflation cooling. The rate of price rise in September stood at 8.62 per cent in September, up from 8.51 per cent in August.

"The inflation is at uncomfortably high level. So continued actions on the part of RBI may be needed," Prime Minister's Economic Advisory Council (PMEAC) Chairman C Rangarajan said in an interview.

He further said that focus of RBI would be more on inflation than industrial production numbers. Industrial production in August nearly halved to 5.6 per cent, prompting calls from India Inc against further rate hikes.

"The inflation rate for September also seems to be as high as that in August. Perhaps, one more round of tightening as that have done previously may be called for," he added.

Rangarajan added that inflation is likely to come down to 6.5 per cent by end of December. The government too expects inflation to ease, primarily because of a fall in food prices on the back of good monsoon.

The Reserve Bank is slated to review its monetary policy on November 2, amid expectations that it could tighten the policy further to fight high inflation.

In its maiden mid-quarterly monetary policy review last month, the central bank upped repo, under which it lends short-term funds to banks, to six per cent and reverse repo, the short-term borrowing mechanism, to five per cent. The hike in the policy rates was the fifth this year.

The decline in industrial production growth from 10.6 per cent a year ago is mainly on account of decline in output of capital goods, a sector which reflects fresh investments in the economy.

Rangarajan, however, expects industrial production to grow at around 9 per cent and Indian economy to register 8.5 per cent growth rate in the current fiscal.