It is important to bring down inflation to five per cent in the medium term, according to Dr C. Rangarajan, Chairman, Economic Advisory Council to the Prime Minister.
Speaking on ‘Current economy and policy options' at the College of Defence Management here on Monday, he said: “We need to use all policy instruments to achieve this.”
The Reserve Bank of India is likely to consider changes in the policy rates in its first quarter policy review slated for July 27.
Along with measures to increase supply of essential items, the monetary and fiscal policies have to be tightened, the economist said.
Food inflation is expected to come down in the coming months due to monsoon, among other factors.
The economy has potential to grow in the range of 9-9.5 per cent during the 12{+t}{+h} Plan period while in the present year, it might clock a growth rate of 8-8.5 per cent.
For achieving this, it is important to control inflation, maintain a ‘comfortable' current account deficit and take up fiscal consolidation, he said.
‘Control expenditures'
“There is a need to control expenditures, especially on the subsidies,” Dr Rangarajan said.
Referring to the recent hike in diesel prices, he said the Government might have to ‘act again' on diesel prices, if there is any further hike in international crude oil prices.
Later, while responding to questions from newspersons, Dr Rangarajan said: “Probably, the RBI would act (on the interest rates) if inflation persists at a higher level.”
Inflation is , however, expected to come down to 6.5 per cent by March 2012, he added.
Food inflation has already come down to 7.7 per cent, driven by decrease in cereal prices even though prices of fruits and vegetables continue to be on the higher side, he pointed out.