The chairman of the Prime Minister’s Economic Advi-sory Council, Dr C. Rang-arajan, on Thursday said that in the present time of high inflation the primary focus of the RBI should be to bring down prices, and not look at growth.
“In context of sagging industrial production a question is asked: what should be the role of monetary policy? Certainly monetary policy must take into account what is happening in the real sector. But the dominant objective of the monetary policy, particularly when inflation remains way above what is considered a comfortable level, then monetary authorities have a major responsibility to contain inflation and, therefore, that becomes the primary focus of monetary policy,” Dr Rangarajan said at the annual Economic Editors Conference.
The RBI has already hiked interest rates 12 times since March 2010 to kill demand and bring down prices. However, Dr Rangarajan said the present repo rate is still lower than the pre-crisis level.
The PM’s chief economic adviser said because inflation is triggered by food inflation does not mean that monetary policy has no role to play. Dr Rangarajan said that when food inflation persists for a longer period it gets generalised and spreads to other sectors, like the manufacturing sector. He said manufacturing inflation was 5.1 per cent in September 2010 and this shot up to 7.4 per cent by March 2011. “Demand pressure also becomes important. Therefore there is a role for monetary policy to control demand pressure and that can be done by raising interest rates,” said Dr Rangarajan.
He said high growth does not warrant a higher level of inflation. Dr Rangarajan was of the view that the government should use all policy instruments and re-anchor inflationary expectations. He said that to contain inflation the government should ease supply side pressure by importing wherever possible and continue to release food stocks, like grains, into the market. He said even though release of food grains will not impact protein base food products like egg, fish and meat, the overall food inflation will come down.