Finance Minister Pranab Mukherjee on Monday admitted that inflation, especially rising food prices, remained a matter of concern for the government and ways of containing it were under discussion with the Reserve Bank of India (RBI).
“Inflation is a matter of concern. The main reason for the high level of inflation is food prices. Inflation [is expected] to further go down to a more acceptable level,” Mr. Mukherjee said while interacting with the media on the sidelines of a conference here, a day ahead of the apex bank's monetary policy review on November 2.
The Finance Minister is understood to have discussed the macroeconomic situation on Friday last week at his customary pre-policy meeting with RBI Governor D. Subbarao. Asked whether another round of hike in key policy rates could be expected as a measure to tame inflation, Mr. Mukherjee said: “Let us wait. The RBI policy statement will be made shortly...I am in discussion with RBI Governor”.
As to what step the RBI will take, the opinion among economic analysts is mixed. Even as one view is that the RBI may go in for a hike in its repo (short-term lending) and reverse repo (short-term borrowing) rates by at least 25 basis points each to rein in inflation, another view is that the apex bank may opt for status quo for now and not tighten credit further owing to the deceleration in industrial growth in August.
Clearly, the choice before the RBI and the government is between containing inflation and spurring growth. Overall inflation during September was at 8.62 per cent, way higher than the RBI's ‘tolerance' level of 5-6 per cent. Feeding the price spiral is food inflation which stood pegged at 13.75 per cent for the week ended October 16.
On the flip side, the argument in favour of a status quo in policy rates is the slowdown in industrial growth in August to a 15-month low at 5.6 per cent against 15.2 per cent in July.
What is worse, the growth in the six infrastructure industries also slipped to 2.5 per cent in September from 3.9 per cent in the previous month.
In its mid-quarterly review on September 16, the Reserve Bank of India had raised the repo and the reverse repo rates to 6 per cent and 5 per cent, respectively.
