New Delhi: The Prime Minister’s economic adviser, C. Rangarajan, wants the Reserve Bank of India (RBI) to siphon excess money from the system to check rising prices as food inflation neared the decade’s high of 20%.
“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 and a former governor of the central bank.
RBI, which is slated to announce its review of the monetary policy on 29 January, can raise the key policy rates to reduce liquidity from the system for checking inflation by curbing demand.
Soaring prices: Prime Minister’s economic adviser C. Rangarajan says if the Union government does not control food prices, it may result in a rise in inflation across the board. Ramesh Pathania / Mint
“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 central bank had increased liquidity in the system by lowering key rates and ratios such as cash reserve ratio, or the portion of deposits that banks are required to deposit with RBI, statutory liquidity ratio (SLR), repo rate, or the central bank’s main short-term lending rate, and reverse repo rate, or the rate at which it sucks out liquidity from the system.
In its review in October, RBI had raised SLR, the percentage of deposits banks need to invest in government securities, from 24% to 25%, signalling the start of a retreat from the easy monetary policy.
The annual wholesale inflation rose to 4.78% in November from 1.34% in October, and is expected by RBI to touch 6.5% by the end of March.
The central bank had earlier projected inflation at 5% by the end of the fiscal year.
Food prices have been relentlessly rising over the last few months, pushing food inflation to a 10-year high of around 20% in December. This has raised fears of a broader inflation and, thus, higher interest rates.
“By March, inflation is likely to grow a little over 7%. We really need to check food inflation otherwise it may result in generalized inflation,” Rangarajan said.
And to check food inflation, which he said 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 RBI and found that there is no reason to believe that excess liquidity is contributing to inflation in the economy,” Mukherjee had said in Kolkata.