Reversal in monetary policy only when inflation is down: PMEAC
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Reversal in monetary policy only when inflation is down: PMEAC

Last Updated: Friday, December 28, 2012, 20:49
 
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Reversal in monetary policy only when inflation is down: PMEAC
Visakhapatnam: The signal for reversal of monetary policy stand by the Reserve bank will come only when inflation shows definite signs of decline, Prime Minister's Economic Advisory Council Chairman C Rangarajan said on Friday.

He also said that high inflation over the last couple of years was due to supply side constrains but that did not mean that monetary policy had no role to play in such condition.

Rangarajan was delivering the P R Brahmananda Memorial Lecture on 'Dynamics of Inflation' at a conference by the Indian Economic Association.

"It is true that the extraordinarily high level of inflation in the last three years was due to severe supply side constrains, particularly of agricultural products, but that did not mean that monetary policy or for that?matter fiscal policy had no role to play in such conditions," he said.

The PMEAC chief added: "Food price inflation, if it persists long enough, gets generalised. Non-food manufacturing inflation has also remained high since April 2010 and at times crossed 8 percent, despite a declining growth rate. Thus, monetary policy, alongwith fiscal policy. Has to play part in containing overall demand pressures."

The changes in the monetary policy cannot have a direct impact on food inflation but it can have a moderating influence by containing demand pressure, he stated.

Maintaining that inflation level of 5 percent is acceptable in the Indian context, Rangarajan said the present level was way above acceptable limit. It might take more than a year to bring it down to 6 percent, he added.

Rangarajan said: "The signal for reversal of the policy will be given when inflation showed definite signs of decline".

A former RBI governor, he also said that since the beginning of 2012-13 fiscal, there has been no tightening but only easing of policy in small steps.

He said the contention that high growth warranted high inflation was wrong, pointing out that in the three years when the country grew at more than 9 percent, the average inflation was only 5.2 percent.

The inflation based on Wholesale Price Index in November was 7.24 percent. During 2012, the highest rate of price rise was witnessed in August when inflation stood at 8.01 percent. However, retail inflation, based on Consumer Price Index remained close to double digit at 9.90 percent in November.

The government expects inflation to moderate during the January-March quarter and March-end at 6.8-7 percent.

Although it would still remain above the RBI's comfort level of 5-6 percent, a rate cut is on the anvil as RBI is expected to work towards boosting growth.

The central bank had hiked key policy rates 13 times by 3.75 percent between March 2010 to October 2011 to tame the rising inflation.

As inflation showed some signs of easing thereafter, RBI lowered policy rates by 0.50 percent in April 2012.

PTI



First Published: Friday, December 28, 2012, 20:49


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