Rangarajan backs bias towards policy tightening

Rangarajan backs bias towards policy tightening

New Delhi: Headline inflation in India will ease to 7 or 8% by December, a top economic advisor said on Friday, higher than earlier official forecasts, and called for a bias towards monetary policy tightening to tame inflation.

The Reserve Bank of India (RBI) is widely expected to raise key interest rates by 25 basis points on Tuesday, its fourth such move since March, as wholesale price index (WPI) inflation has come in above 10% for the past five months.

“There must be a bias towards tightening because the demand situation also needs some control," said C Rangarajan, chairman of the Prime Minister’s Economic Advisory Council.

“By December of this year the headline WPI inflation will come down to a level between 7 and 8%," he told a news conference.

Headline inflation should further ease to 6.5% by the end of the fiscal year in March 2011, the Prime Minister’s Economic Advisory Panel said in a report released on Friday.

The panel report also sees GDP growth in the current fiscal at 8.5%, in line with government forecasts.

The panel report also said capital inflows will ensure that the current the account deficit in the current fiscal can be managed. The panel expects the current account deficit at 2.7% of GDP in the current fiscal.

The deficit widened to $13 billion in the January-March quarter, the biggest since 1981, compared to $12.2 billion in October-December, official data showed.

Capital flows have been robust this year with an inflow of $8.5 billion so far.