The Prime Minister's economic panel on Wednesday said inflation, under acute pressure from certain food items, is likely to come down to 7% for December, data for which is yet to be released. Furthermore, the panel expects the rate of inflation to decline to 6-6.5% by the end of this fiscal.
The panel has also said that RBI's decision to further tighten policy rates to tame inflation would depend on price behaviour, especially of food items, in the weeks following December 18, 2010. The Reserve Bank is slated to review monetary policy later this month.
Prime Minister's Economic Advisory Council chairman, C Rangarajan told reporters in New Delhi that inflation rate could be considered comfortable only when it comes down to 4%. "We have always thought that inflation rate should remain close to 4%. Therefore, I would regard any inflation above that level as uncomfortable...Inflation is likely to be around 7% by December end and between 6 and 6.5% by March end," Rangarajan said on the sidelines of the Skoch summit.
He said the rate hike by the RBI will depend on the price behaviour during December and January. "We still have three weeks to go. If the inflation rate comes down significantly, then there may not be any need for action but on the other hand, if inflation remains sticky then action will be required," Rangarajan said.
Though overall inflation moderated to 7.75% in November from 8.58% in October, food inflation increased rapidly in the first half of December. From 8.69% during the week ended November 27, food inflation rose to 9.46% for the week ended December 4. It rose further to 12.13% the following week, and shot up to 14.44% for the week ended December 18.
High onion prices, coupled with that of milk, were blamed for high food inflation.
The Reserve Bank last year raised policy rates six times to rein in inflation. However, in its mid-quarterly review in December, RBI refrained from raising these rates, since the system was facing a cash crunch. Instead, the RBI announced measures to inject Rs 48,000 crore into the system.
The central bank has, however, cautioned that its measures should not be interpreted as reversal of a tight monetary stance, since inflation still continues to be major concern.
On the cash crunch, Rangarajan said,"the liquidity situation will improve in this quarter, because of expected rise in government expenditure".
The RBI has blamed the government's high cash balance for creating liquidity shortage in the system. While the Government got additional Rs 70,000 crore from the sale of spectrum for high speed mobile and broadband services over the budget estimates, it has not been spending commensurately.