The Prime Minister's Economic Advisory Council chairman, C Rangarajan, on Monday suggested that the Reserve Bank of India (RBI) could reduce money supply and raise interest rates to tame the rising prices of food articles, reports PTI.
"If price decline does not happen in December, then early steps could be taken. The RBI could increase interest rates. (It) preferably could reduce liquidity by acting on CRR,” he said.
Mr Rangarajan was responding to a question on what measures the RBI should take to moderate food inflation, that has climbed to a 10-year high of 20% during the first week of December, driven mainly by higher prices of potato, other vegetables and pulses.
Making a case for reduction in money supply, Mr Rangarajan, also a former governor of the RBI, said that the apex bank could raise the cash reserve ratio (CRR), the portion of amount that banks are required to keep with the central bank.
Through a slew of measures, the RBI has injected liquidity into the system to help the cash-starved industry to combat the adverse impact of the global financial meltdown since September last year.
The RBI governor, D Subbarao, had met finance minister Pranab Mukherjee on 18th December, fuelling speculation that monetary policy would be tightened.
The RBI in October had raised the statutory liquidity ratio (SLR), the portion of funds that banks are required to park in government securities, to 25%, though it retained the CRR at 5%.
The central bank will come out with its next monetary policy statement on 29 January 2010.
— Yogesh Sapkale