Rangarajan seeks rate hike to check inflation

Even though the intractably high food inflation faced by India is primarily due to supply side constraints, a solution will have to necessarily come through further tightening of the monetary policy , because there is practically no other handle the government is left with, Prime Minister's Economic Advisory Council chairman C Rangarajan said. His comment comes at a time when the RBI, which increased interest rates six times in 2010, is widely expected to raise key rates by at least 25 bps at its January 25 review. "I think there is a case for the monetary policy to be tighter because if the food inflation persists, it could spread to other sectors of the economy ," he said. He added that a bunching of government expenditure in the last two months of the fiscal would help address the liquidity problem in the banking system, which is worrying India Inc. To ease liquidity, RBI last month reduced SLR by one percentage point to 24%. The former RBI Governor said he expected headline inflation to moderate to 7% by end-March (which is way higher than RBI's projected level of 5.5% or earlier forecast of 6-6.5% by other key policymakers). Stating that we will have had two years of high inflation by end-March, he noted that the elevated level of inflation this year had little to do with external factors, in contrast with last year when global commodity boom too drove domestic prices. This is because the domestic prices of petroleum products have been insulated, to a large extent, from the spike in global crude prices. But, Rangarajan said, if crude prices rise beyond a level, then they would indeed start impacting domestic prices.