Advisory panel backs RBI monetary policy tightening

New Delhi, July 23 (IANS) India’s central bank should look at tightening the monetary policy to tame sustained inflation, now that the country’s economic growth trajectory looked firmer, the Prime Minister’s Economic Advisory Council said here Friday.

‘Monetary policy has to move away from an accommodative stance sooner than what is happening in other countries. There must be a bias towards tightening because the demand situation needs some control,’ said Council Chairman C. Rangarajan.

He said there had been a strong inflationary expectation built in the country as a consequence of a substantial rise in food prices and the whole sale price index in 2009-10. ‘Therefore, Indian monetary policy has to take into account this important element in the economy.’

He felt the monetary policy will complete the exit process.

As per the council’s estimates, the Indian economy is set to grow at 8.5 percent this fiscal and 9 percent the next year, in an year when the recovery globally after the financial crisis will be anaemic.

The annual inflation rate based on wholesale prices, was estimated at 10.5 percent for June. The Council believes it will fall to around 7-8 percent by December and and further to 6.5 percent by March next year.

The Reserve Bank of India will take up its first quarter monetary policy review July 27. Having chosen to increase the repo and reverse repo rate by 25 basis points June 2 in a mid-cycle decision, it is expected to effect another hike in key interest rates.

The advisory council also predicted that the agriculture sector would grow by 4.5 percent, industrial production by 9.7 percent and services by 8.9 percent this fiscal.

‘The 4.5 percent growth in agriculture after a decline of 0.2 percent last fiscal is, of course, on the presumption of normal southwest monsoon,’ Rangarajan, a former governor of India’s central bank, said at a press conference here.

The country’s gross domestic product had expanded by 7.2 percent last fiscal and 6.7 percent the year before, after a fast-paced expansion of 9.2 percent, 9.7 percent and 9.5 percent in the preceding three years respectively.

The panel also said capital inflows will ensure that the current the account deficit in the current fiscal could be managed. It expects the current account deficit at 2.7 percent of the GDP (gross domestic product) in the current fiscal.

He said food and fertiliser subsidies needed rationalisation and operationalising the Goods and services tax (GST) was a priority.

The remarks by the chief of the high-profile council comes a day ahead of the mid-term appraisal of India’s 11th Five Year Plan by the National Development Council, the country’s top policy forum, led by Prime Minister Manmohan Singh.

The Planning Commission, which will host the meeting to be also attended by all chief ministers, has already conceded that the target of 4 percent farm sector growth during the tenure of the plan period (2007-12) will prove illusive.

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