RBI hints at more monetary action to curb inflation

November 22nd, 2011 - 8:25 pm ICT by IANS  

Hyderabad, Nov 22 (IANS) Reserve Bank of India (RBI) Governor D. Subbarao Tuesday did not rule out further monetary action to curb inflation.

He said monetary steps may be warranted in the face of sustained rise in food prices.

“The direct role of monetary policy in combating food price pressures is limited, but in the face of sustained high food inflation, monetary action may still be warranted to anchor inflation expectations,” he said while addressing the 25th annual conference of the Indian Society of Agricultural Marketing.

The central bank has raised rates 13 times since March 2010, but it recently hinted at pause in rate hikes in the December policy if inflation falls in line with the RBI’s projected trajectory.

He felt the solution to high food prices lies in a supply-side response from the government.

“A lasting solution to food price pressures lies in a supply response that raises agricultural production and productivity, improves supply chain management and sets the right incentive framework for both producers and consumers.”

“The outlook on food inflation in the short to medium term will be determined by the speed and quality of such a supply response by the government,” he added.

He identified large increases in the minimum support prices of foodgrain by the government to farmers as one of the reasons driving food inflation.

He said shift in dietary habits towards protein-rich foods, pressure stemming from inclusive growth policies, shocks from global food inflation, and financialisation of commodities were the other factors driving high food prices.

“Inflation is a regressive tax and hurts the poor the most. The impact can be particularly severe in a country like India with a population of 1.2 billion, a per capita income of less than $1,500 and a large share of food in the total consumption basket,” he said.

Subbarao said that the government’s food for work programme and proposed food subsidy bill had the potential to further raise fiscal deficit and inflationary pressures.

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