More fiscal, monetary measures likely: FM, RBI

The government and the Reserve Bank of India indicated that they could take more fiscal and monetary measures to contain inflation rate within the central bank's comfort zone of below 5 per cent.

Finance Minister P Chidambaram said inflation is a major concern and the government will take all possible steps, both fiscal and in terms of improving supplies. The RBI will also do its bit on the monetary side to contain inflation, he added.

While Chidambaram said "India will have to do with little less growth in 2008-09 when inflation is rearing its head," RBI Deputy Governor Rakesh Mohan said the price rise remained a concern and the intention is to contain it under 5 per cent and reduce it further in the medium term.

The finance minister also attributed the rise in inflationary expectations to a certain degree of hoarding by wholesalers to take advantage of rising prices.

"Inflation is not due to policy mistakes or a distortion," he said in his address at the centenary celebrations of the Indian Merchants' Chamber.

The finance minister, however, appeared confident of containing the price rise, which could become a political headache ahead of elections in crucial states this winter.

While an increase in key policy rates is not expected in the immediate future, the assessment on Mint Road is that the Centre will leave its cash balance with the RBI untouched, which will help it check further addition to money supply, which in turn fuels inflation.

In addition, RBI is expected to juggle the Centre's borrowing programme to manage liquidity, while limiting the use of the market stabilisation scheme (MSS), the money used to suck out forex inflows from the system.

The MSS adds to the government's interest liability and by restricting its use, as has been the case in the last few weeks, the RBI has helped the Centre show a healthier fiscal balance.

The yield on the government's 10-year paper went up 13 basis points to close at 7.90 per cent today in a knee-jerk reaction after the inflation data were released.

In Ahmedabad, Rakesh Mohan said price and financial stability were crucial to sustain growth at current levels. "To keep the momentum of high growth, it is extremely important to recognise that the best contribution monetary policy can make is indeed to ensure that inflation and inflation expectations are well anchored," he said.

At the same time, Mohan said: "In view of the success in reducing the inflation rate from the long-run average of 7 to 8 per cent to 4 to 5 per cent now, society's tolerance level for inflation has also come down."

Chidambaram said the import of items like crude oil, metals and food meant that India was also importing high inflation since international prices have risen sharply.

"For the last four years we have been able to balance inflation and growth and we will continue with this effort. In the short term we can remove certain bottlenecks in supply, rush commodities, especially food items, quickly to areas where they are needed the most and tone up the public distribution system to plug the leakages," he said.

In the long run, the minister said, the solution is in being self-sufficient, or near self-sufficient in wheat and pulses.