The target for inflation expectation is in the range of 4-4.5 per cent Dr Y.V. Reddy, RBI Governor.
Terming the current high level of inflation as “totally unacceptable”, Dr Y.V. Reddy, Reserve Bank of India Governor, today indicated further measures to rein in inflation.
The central bank had hiked Cash Reserve Ratio by 25 basis points to 8.25 per cent last month.
Speaking at a seminar in Singapore today, Dr Reddy said, “The current high level of inflation is totally unacceptable, especially in terms of impact on inflation expectations.”
Inflation has touched 7.83 per cent as on May 3.
Dr Reddy said “Monetary policy in India accords appropriate priority for price stability in recognition of its significance for the large segment of the poor who have no hedge.”
Going ahead, the target for inflation expectation is in the range of 4-4.5 per cent, so that it is possible to achieve a medium term inflation of 3 per cent.
“In the event of new adversities emanating in the domestic and global economy at any point of time, RBI is in readiness to respond swiftly and appropriately,” he said.
Mr D.K. Joshi, Principal Economist, Crisil, felt that dealing with the current inflationary situation would call for a closer co-ordination of fiscal and monetary policy.
While the central bank could use interest rate and other monetary weapons to constrain demand pressures, the Government, through a prudent fiscal policy, should ensure no runaway increases in its spending that would boost consumption.
Customs duties
The Government could also use fiscal policy to remove supply-side bottlenecks through reductions in customs duties. “The reductions in import duties has to some extent worked in edible oils and even steel and cement.”.
Mr Joshi was, however, sceptical about a third option of ‘physical policy’, involving ban on exports and futures trading, imposition of stock limits, price controls, etc.
“Price controls on petro-products, for instance, have sent wrong signals by boosting consumption. If the sector had been de-controlled, prices would have gone up gradually and, at the same, consumers would have got the right signal to conserve energy”, he added.
Mr Saumitra Chaudhury, Member of the Prime Minister’s Economic Advisory Council, said that the Government should concentrate on improving efficiency of its utilities and cutting down on procedural delays impeding creation of new production capacities.
“In cement, the coming up of additional capacities towards the end of last fiscal has had a sobering impact on supplies.
“Similarly, by expediting coal linkages to power projects and also augmenting availability of electricity from the grid, it can help manufacturers to reduce costs by relying less on expensive genset-based power at Rs 8-9 a unit”, he noted
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