With food inflation reaching double digits, the Chairman of the Prime Minister's Economic Advisory Council, Dr C. Rangarajan, says the Reserve Bank of India would be justified in hiking interest rates. But, he said, this should be complemented by fiscal policy and supply management.
The RBI is scheduled to review the monetary policy on October 25.
Addressing the Economic Editor's Conference, he said, “If you see the industrial growth rate sagging, it is not just the interest rate that is responsible. There are other reasons too.” Industry has been complaining that the over 350 basic points hike in key policy rates by the RBI since March is hurting them.
Dr Rangarajan added that the repo rate is still lower than the pre-2008 level. The repo rate is the rate at which the RBI gives credit to banks.
He believes that inflation will start declining from December. “We can see seasonal decline in November and December. It is expected to come down to 7 per cent by March-end,” he added.
On fiscal policy, Dr Rangarajan felt that excise duties and service tax can be raised to pre-2008 levels. But added that it would be unwise to do so in the middle of the year.
As a third policy tool for tackling inflation, he asked for more foodgrain stocks to be released in the open market. The government has allocated 10 lakh tonnes of wheat and rice for the open market scheme. Last month, it lowered the effective price for picking up such stocks.
FDI in multi -brand retail
Dr Rangarajan said the opening up of retail is independent of containing inflation. This is in contrast to the recommendation of the Inter Ministerial Group, headed by the Chief Economic Advisor, Dr Kaushik Basu. The group had said that FDI in multi-brand retail should be allowed in order to curb inflation.
Dr Rangarajan said first, there is no surety on the number of multinational companies that would be interested in setting up contracts for the farmers and secondly, no one can ascertain the impact of opening up of the sector.