Ahead of the RBI's monetary policy review on Tuesday, the Prime Minister's economic (PMEAC) panel today pitched for tightening of money supply as current inflation rate at over 10 per cent is double than the comfort level and can hurt high economic growth in the medium term.
Describing inflation as source of major concern for quite some time, the PM's Economic Advisory Council Chairman, C Rangarajan, told reporters that inflation would start coming down only by August-September and stands at 7-8 per cent in December, before declining to 6.5 per cent by this fiscal end.
As such, PMEAC's projections of inflation in its Economic Outlook for 2010-11 was a percentage point higher than 5.5 per cent projected by RBI. Rangarajan attributed this to the impact of fuel price hike on inflation.
"A bias towards (monetary) tightening is necessary," Ranagarajan said.
He said if RBI does not take strong monetary action to contain inflation, it can opt for a series of "baby steps" after July 27 monetary review.
"Evidence on the funds flow side, as well as on the output side, clearly shows a strong economic recovery. In the backdrop of inflation rates that are more than twice the comfort-zone, it is important that monetary policy completes the process of exit and move towards a bias on tightening," Rangarajan said.
He said controlling high inflation is essential for sustainable growth in the medium term.
It is widely expected that RBI in its July 27 monetary policy review will raise short-term key rates, repo and reverse repo, to tame inflation that has been in double digits for a fifth month in a row at 10.55 per cent in June.
However, the former RBI Governor refused to go into specifics that he will prescribe for RBI to take in its July 27 monetary review.
The Reserve Bank has already started tightening money supply to tame inflation, that has been in double digits for the fifth month in a row. Earlier this month, it raised its short-term lending and borrowing rates (repo and reverse repo) by 25 basis points.
This is a reverse of RBI's stance of easing money supply after the collapse of US financial services major Lehman Brothers deepened global financial crisis in September 2008.
Rangarajan said inflation is triggered by food prices.
To control food inflation, he prescribed release of foodgrains through PDS in a manner to dampen these prices and continuation of import of wheat, rice and sugar on zero customs duty.
Even after a decline, food inflation stood at 12.47 per cent during the week ended June 10.