Finance Minister Pranab Mukherjee today said Reserve Bank of India (RBI) Governor D Subbarao would tighten monetary policy, if excessive consumer demand stoked inflation.
“He is keeping a watch on the demand side… And if it is found that the demand side needs to be taken care of, necessary adjustments will be made,” Mukherjee said during a debate on inflation in the Rajya Sabha.
The finance minister’s statement came hours after Subbarao said in Hyderabad that more monetary policy action was required to check rising prices, calling it the “first line of defence” against inflation.
The governor, who raised interest rates last week for the fourth time since mid-March, said consumer demand was strengthening in India and fanning prices.
“It is our duty to manage inflationary expectations. Now, as inflation gets more generalised and demand-side pressures build up, there is a need for monetary policy action,” Subbarao told reporters. The governor and the finance minister had met Saturday, four days after the policy, to discuss the inflation situation.
The wholesale price-based inflation was estimated at 10.55 per cent in June. According to the latest data released today, wholesale food inflation fell for the seventh straight week to 9.53 per cent for the week ended July 24, driven largely by the base effect. Inflation based on consumer price index for industrial and agricultural workers is close to 14 per cent, second only to Venezuela’s 32 per cent inflation rate, according to Bloomberg data. The Opposition parties had stalled Parliament over the issue of inflation. But unlike the last few weeks, when the finance ministry and RBI were involved in a duel over aspects related to say over financial stability and inter-regulatory coordination, the finance minister was all praise for the central bank today.
He told Parliament that RBI was setting rates to ensure that government borrowings and company investments did not get too expensive in the attempt to contain inflation. “The Reserve Bank is managing in such a way that one does not elbow out the other. And that is a very skillful exercise. I must appreciate the role that the RBI governor has played in the last year — there was no mismatch in the market and there was no crowding out in the market,” the finance minister said.
