RBI can hike key rates to control price rise

RBI can hike key rates to control price rise
Times of India, December 22, 2009, Page 23

New Delhi: The Prime Minister's Economic Advisory Council chairman, C Rangarajan, on Monday suggested that the RBI could reduce money supply and raise interest rate to tame the rising prices of food articles.

"If price decline does not happen in December, then early steps could be taken. RBI could increase interest rates...preferably could reduce liquidity by acting on CRR," he said.

Rangarajan was responding to a question, what measures the RBI should take to moderate food inflation that climbed to a 10-year high of 20% during the first week of December, driven mainly by higher prices of potato, other vegetables and pulses.

Making a case for reduction in money supply, Rangarajan, also a former Reserve Bank governor, said the apex bank could raise the Cash Reserve Ratio (CRR), the portion of amount that banks are required to keep with the central bank.

Through a slew of measures, the RBI has injected liquidity into the system to help the cash-starved industry to combat the adverse impact of the global financial meltdown since September last year. The RBI Governor, D Subbarao had met finance minister Pranab Mukherjee on December 18, fuelling speculation that the monetary policy would be tightened.

The RBI in October had raised the Statutory Liquidity Ratio (SLR), the portion of funds that banks are required to park in government securities, to 25%, though it retained the CRR at 5%. The central bank would come out with its next monetary policy statement on January 29.

Political pressure is mounting on the governing coalition headed by Prime Minister Manmohan Singh to arrest the price rise. Opposition parties have accused the government of being ineffective in tackling prices and disrupted parliament proceedings. A parliamentary panel last week took the government to task for failing to curb inflation. Former RBI governor Bimal Jalan, meanwhile, said the central bank needs to drain cash from the economy to check speculation in commodities, reports Bloomberg. PTI.