The Reserve Bank is constantly monitoring the inflation scenario and will further tighten the monetary policy if there is excess liquidity in the system, Cabinet Secretary KM Chandrasekhar said on Tuesday.
"If it (inflation) is on account of liquidity being much greater, then obviously there is a call for more monetary measures," Chandrasekhar told reporters on the sidelines of a function hosted by the industry body CII in New Delhi.
The Reserve Bank is scheduled to review its monetary policy on July 27 and is expected to further hike its key policy rates, the short-term lending (repo) and borrowing (reverse repo) rates, which stand at 5.5 and 4 per cent, respectively now.
Earlier this month, the central bank had raised repo and reverse repo rates by 25 basis points each to check inflation.
"They (RBI) will be constantly watching this issue and they will be taking the (right) measures as they go along," the Cabinet Secretary said.
Overall inflation, which has been in double-digits for the past several months, stood at 10.55 per cent in June.
"A call will have to be taken by RBI whether inflation is on account of high money supply or on account of certain sectoral reasons, or some supply constraints," Chandrasekhar said, adding if high inflation is due to supply constraints then the government will have to take steps to ease that.
Further, on the withdrawal of stimulus measures provided by the government and RBI after the global financial crisis, he said, "as we go along, the government and RBI will have to make changes."
He further said, "as far as stimulus measures are concerned, they are a set of measures that we took at that particular point of time. But now those stimulus measures have got integrated into the system, they are part of our system."
Following the global financial meltdown, the government had announced a slew of incentives and tax concessions to the industry beginning December 2008.
In three tranches, the government had cut excise and customs duties and service tax.
However, following the industrial recovery, the government rolled back some of those duty rebates in the last budget but still lower than the pre-December 2008 levels.
Similarly, the central bank had unveiled many a financial stimulus measure by bringing down interest rates and increasing credit availability to the industry.