Food inflation may prompt RBI to reduce liquidity: Rangarajan

In the coming days, both fiscal and monetary accommodative policies may have to be withdrawn gradually amid high fiscal deficit and rising inflation, particularly food inflation

The Reserve Bank of India (RBI) may start sucking out money from the system to combat inflation, but this depends on how food prices move this month, the prime minister's Economic Advisory Council (PMEAC) said on Friday.

"The RBI could take action after watching the behaviour of prices in December to restrain liquidity. The RBI might start by reducing the liquidity in the system," PMEAC chairman C Rangarajan told reporters on the sidelines of a FICCI seminar.

Food inflation rose to 17.47% for the week ended 21st November against 15.58% in the previous week, while overall WPI inflation doubled to 1.34% in October compared to 0.5% in the previous month. The RBI is scheduled to come out with its quarterly review of the monetary policy in January.

Separately, RBI governor D Subbarao said that the central bank would revisit the growth inflation projection figures in January. He, however, side-stepped the question of possible intervention to contain soaring prices.

Mr Subbarao's statement on 'revisiting' the growth projection indicates possible upward revision in the light of considerable rise in gross domestic production (GDP) growth to 7.9% during the July-September quarter. 

The RBI governor, however, declined to give an idea on whether the central bank would intervene to check rising prices of various articles, particularly food items.

"I cannot answer now whether RBI needs to intervene or when it will intervene. If we take a decision, we will let you all know about it," the RBI governor said after a meeting with Orissa chief minister Naveen Patnaik in Bhubaneswar.

The PMEAC chairman said that though food inflation must be primarily handled through supply management, there is a role for monetary policy as well. "In a period of scarcity, if the money supply growth is very strong, it will also aggravate food inflation," he said.

The RBI has projected that the wholesale price inflation would rise to 6.5% by end of this fiscal.

Mr Rangarajan added that in the coming days, both fiscal and monetary accommodative policies may have to be withdrawn gradually amid high fiscal deficit and rising inflation, particularly food inflation.
— Yogesh Sapkale
 

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