PMEAC Urges RBI To Further Tighten The Policy (23-Jul-2010)
The Prime Minister’s Economic Advisory Council (PMEAC) said on Friday that the central bank should tighten the monetary policy bit more aggressively as inflation continued to remain on the higher side. While the council expects the inflation to come down, it nonetheless wants the RBI to take care of demand side of the economy.
C Rangarajan, Chairman of the Council, said liquidity scenario was reasonable to help get good impact of Reserve Bank of India’s (RBI) policy rate action. 'Liquidity conditions are taut enough for monetary policy signals to be appropriately transmitted to the financial sector… bias toward tightening is necessary,' he said while releasing the economic review prepared by the council.
Rangarajan’s remarks regarding the need for greater policy tightening takes importance in the fact that these came just a few days ahead of the scheduled quarterly policy review. The chairman, himself a former RBI Governor, said that the RBI should use the necessary levers to ensure demand side causes of inflation remain in check.
The PMEAC maintained that inflation was close to the peak and is likely to come down going forward. The council pegged the wholesale price based inflation at 7-8% for December and around 6% for the fiscal-end. However, the December estimate of the council is already quite high compared with 5-6% which government has been expecting, thus again making a case for the RBI to pick up the pace of policy tightening.
The central bank had raised its benchmark policy rates -- repo and reverse repo -- by 25 basis points (bps) earlier this month in wake of WPI inflation remaining in double digit levels for three consecutive months. However, as the inflation problem, which started in food commodities, generalises into broader economy, the central bank may raise rates again by 25 bps in the forthcoming review.
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