Mumbai: The Reserve Bank of India (RBI) may withdraw some monetary stimulus if inflation rises towards the end of 2009, C Rangarajan, chairman of the Prime Minister’s economic advisory council, said on Wednesday.

“If inflation pressures develop, monetary authorities may take measures earlier. RBI will wait and see how price situation develops in Nov-Dec,” Rangarajan said.

The fiscal deficit needed to be reduced by 1 to 1.5 percentage points in the next fiscal year, he said.

“Next year we might have to start the process of withdrawing some of the measures,” he said referring to the fiscal stimulus, adding that excise duties needed to be adjusted while the government’s expenditure needed to be cut in 2010-11.

He said, however, the roll-back of tax incentives would also depend on the way the economy evolves.

Rangarajan said with expectations of a normal monsoon, the economy is likely to grow by 7-8% in the next fiscal.

The GDP grew by 6.1% in the first quarter of 2009-10 and the year may end with 6.5%.

On monetary policy, he said if inflationary pressure builds up, the RBI may begin tightening rates even earlier.

“If the inflationary pressure develops, then authorities (RBI) may take action even earlier... RBI will have to wait and see how price situation evolves during the period of November-December,” former RBI governor said.

Inflation, which was at 0.1% for the week ended 24 October, is expected to rise to around 5% by March next year while food inflation is already hovering around 15%, burning a hole in the pocket of the common man.