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RBI hints at tightening money supply to curb inflation

Concerned over the spiralling food prices, the Reserve Bank has indicated at tightening money supply to contain the rising inflation pressures.

Bangalore: Concerned over the spiralling food prices, the Reserve Bank has indicated at tightening money supply to contain the rising inflation pressures.

"Effective assessment of the inflation process, and using monetary policy actions at the right time would be critical to enhance the effectiveness of the inflation management policy,” RBI Deputy Governor Shyamala Gopinath said while addressing the Bangalore Chamber of Industry and Commerce here on Monday.

She further said there is a risk of high inflation in essential commodities affecting inflation expectations over time and give rise to generalised inflation. "Given the dominance of food price inflation in shaping the overall course of the inflation path, the policy challenge is to address the supply constraints," Gopinath added.

The Reserve Bank is slated to come out with the third quarter review of its monetary policy on January 29 amid intense speculations that it may signal an interest hike to tighten money supply to contain the rising inflation.

The food inflation was nearly 19 per cent last week while the overall wholesale price inflation rose massively to 4.78 per cent in November compared to 1.34 per cent in October.

The deputy governor further said the near-term policy challenges are clearly conditioned by the evolving growth-inflation outcome that supports shifting the balance of policy focus on managing the recovery and on containment of inflation.

Early this month, Prime Minister`s Economic Advisory Council chairman C Rangarajan had said food price must be controlled by monetary action as it is tended to lead to manufacturing inflation.

However, the Government maintains that food-price inflation cannot be tackled by monetary and other policy steps. "Food inflation is a larger part of the inflation now...therefore not much can be done by policy instruments," Finance Secretary Ashok Chawla had said.

Gopinath also said the overall business confidence has improved significantly, besides the industrial and overall recovery in growth.

"While capital inflows have resumed after the period of net outflows in the second half of 2008-09, there is a perception that the country may experience surges in capital inflows again, because of easy global liquidity conditions and our superior growth prospects in the global economy," she added.

She also said as the domestic recovery gains further momentum and sustainability, returning to the fiscal consolidation path will be critical to contain the constraints to higher growth rate.

After registering nine per cent GDP growth rate in the three preceding years, the economy could manage only 6.7 per cent last fiscal. However, in the second quarter of this fiscal, the economy logged in a smart 7.9 per cent growth, beating analysts, compared to just 6.1 per cent in the first quarter.


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