Reserve Bank must continue with its anti-inflation stance - C RANGARAJAN

C. Rangarajan, chairman of the Economic Advisory Council (EAC) to the Prime Minister (PM), said the Reserve Bank of India (RBI) must persist with its anti-inflation stance. Edited excerpts: Every time we are close to a 9% growth rate in the economy, we have inflation and all signs of overheating. That is a real quandary for policymakers and the government.  I don't think it's the over- heating of the economy in the current situation. The in flationary pressures have been mounting primarily be- cause of the failure on the food front. Last year, it was the decline on the foodgrain output and in the current year it has been the extraordinary rise in the prices of vegetables and certain other agricultural products. It's only recently the manufacturing sector has seen a rise in inflation, but that isn't very high either. I personally do not think that it is the high growth that is creating the inflation. It is the supply- side bottlenecks in specific areas, which is resulting in current levels of inflation. So isn't it high time we looked at the larger picture and took more structural steps to improve the situation? Well, last year when we had the imbalance due to the decline in the foodgrain production, the public distribution centre was activated and more foodgrains were pushed into the system. So you see the impact of it in the current year. As you will see in the case of cereals, the in- crease in the current year has been very modest and also in the case of commodities like pulses, the year-on-year in- flation is negative. Therefore, action taken last year has had the impact of bringing down foodgrain prices. But in the current year, we also had problems with respect to vegetables and fruit, where the prices rose very high and there was no method where we could reduce the inflationary pressures arising from this group, because there is no stock available with the government to re- lease in the market. The only thing that could be done is allow import wherever possi- ble. So I feel inflationary action has been taken. In the coming months, we should see inflationary pressures softening. Where do you see inflation settling? For 14 months in a row, we've been above 8%, even though we've had a couple of rate hikes in the interim. How do you see it panning out? I think it will decline in March, because in the four weeks of March, you'll see a further decline in the food prices. Therefore it will have an effect on the overall head- line inflation. We had expected that by March 2011, the headline inflation will come down to 7%, perhaps it will stay a little higher or a little above that level. Should RBI go easy on increasing interest rates beyond this point? I don't think so. The over- all inflation remains at a high level, even after adjustments in foodgrain prices. Inflation even at the end of March will remain above 7%, which is a very high level and, therefore, RBI must persist, as they have indicated in their review, in the anti-inflation stance.