RBI may further squeeze money supply to control inflation

[suguhopes]

The Reserve Bank may go in for further tightening of money supply as
there is no likelihood of inflation coming to single digit in the next
six months, according to indications given by the central bank
governor to a parliamentary panel.


Some more monetary measures may be taken to contain the aggregate
demand to counter inflation, RBI Governor Y V Reddy told members of
the Parliamentary Standing Committee attached to the Finance Ministry
earlier this week, sources said.



Sources said Reddy admitted that there will be no easing of inflation
in the next six months. Rather it will now go over 12 percent, the
Governor is understood to have said.



When some members asked why is inflation inching towards 12 percent
mark, while in countries like Britain it is below four per cent, Reddy
replied that different countries have different yardsticks for
measuring inflation.



According to sources, the Governor did not give any answer to a
question by members that why are prices of vegetables rising when the
Government says inflation is imported.



Last month, the central bank has raised short-term lending rates for
banks-- repo-- by 0.75 per cent in two installments, while also
increasing mandatory cash deposits of banks by 0.50 per cent in two
phases to suck out excess liquidity.



RBI is now slated to announce quarterly review of credit policy on
29th July, when it may announce further measures to absorb money
supply.



Inflation has been scaling new 13-year highs after the government's
move to raise prices of petrol, diesel and LPG was reflected in the
data. For the week ended 28th June, inflation rose to 11.89 per cent.



The government would release official inflation data on Thursday,
against the usual practice of announcing it on Friday.



Meanwhile, the government has been drawing flak from both the Left and
the right parties for its failure to tame price rise.



The Finance Ministry, however, had claimed last week that prices of 30
essential commodities have somewhat stabilised.



The government, along with RBI, has been taking steps to counter
inflation.



However, now monetary measures are expected to be used more than the
fiscal steps as the finance ministry has already said," monetary
measures are the first line of defence (to control inflation)."



In the recent development, global rating agency Fitch while
downgrading India's domestic credit outlook to negative from stable,
said inflation has continued to accelerate despite steps taken by the
RBI to tighten monetary policy.



It added that with inflation nearing 12 per cent, there could be
further tightening of monetary policy in the days to come.



Another global rating agency Standard and Poor's last week had said it
might downgrade India's sovereign ratings, if the country's rising
inflation, widening fiscal deficit and political instability continues
in the longer term.

N.Sukumar
Research Analyst