The Prime Mini-ster’s Economic Advisory Council on Friday recommended a tightening of monetary policy to rein in double-digit inflation just days before the Reserve Bank’s scheduled policy review on Tuesday.
Releasing the Economic Outlook for 2010-11, the PMEAC chairman, Dr C. Rangarajan, said: “There must be a bias towards tightening because the demand situation also needs some control.” He said he expected the RBI to take some “baby steps” to arrest the situation.
The council’s report predicted that inflation would start easing by August-September, cool to 7-8 per cent by the end of December, and then fall to 6.5 per cent by March 2011. Inflation was in double digits, at 10.55 per cent, in June. “In the backdrop of inflation rates that are more than twice the comfort zone, it is important that monetary policy completes the process of exit and moves towards a bias on tightening with respect to normal monetary conditions,” the report said, saying this was essential to maintain price stability and to “create conducive conditions for sustainable growth in the medium term”. Mr Rangarajan said he did not believe the economy was overheating as double-digit inflation was due to high food prices.
Mr Rangarajan said that in order to bring down food inflation, the government should release foodgrains through the public distribution system to dampen these prices and continue imports of wheat, rice and sugar on zero customs duty.