Inflation: All eyes on the central bank

Our Bureau NEW DELHI

    THE CENTRAL bank is clearly now in the driver's seat in the government's fight against inflation. Calling it the first line of defence to douse scorching inflation, the government said the Reserve Bank of India would take monetary steps to counter inflation and address inflationary expectations.
    RBI governor Y V Reddy met prime minister Manmohan Singh and finance minister P Chidambaram and discussed measures to control inflation.
    Finance secretary D Subba Rao said: "We expect the central bank to take some more action. It is for the RBI to take a decision and do so when it is appropriate. The RBI governor has held discussions with both the prime minister and the finance minister on Saturday."
    The RBI is scheduled to review its monetary policy on July 29. It is not clear whether the central bank will wait to take steps till the US Federal Reserve meeting, where its chairman Ben S. Bernanke is expected to bring in a pause in view of rising inflation in the world's largest economy.
    On whether the government had run out of fiscal options to control inflation, Mr Rao said: "The government has not run out of fiscal options to control inflation, but the first line of defence in monetary action by the RBI." Inflation touched a higherthan-expected double digit figure of 11.05% — a 13-year high for the week ended June 7. This reflected a 10% increase in administered fuel prices on June 4. The RBI had hiked the repo rate by 25 basis points to 8% on June 11.
    The RBI will take into account all factors before taking these steps. Finance ministry officials felt that increasing interest rates would not have an impact on real interest rates in the long term, therefore not affecting investment demand. Deposits are already accruing negative returns. Bankers and analysts expect the RBI to hike both the repo and cash reserve ratio by at least 25 basis points.
    Arvind Virmani, chief economic adviser to the ministry of finance, said: "The increase in inflation this time is different from the earlier supply side shocks. Similar shocks have been experienced by other economies. What monetary action will do is to put a lid on inflationary expectations. Central banks across the world are moving to address inflationary expectations. There are limits to how much we can manage supply side pressures. As pointed out, even if demand side pressures are not a part of the problem, managing demand can be a part of the solution."
    "There is certainly a trade off between growth and inflation. And in times like this, inflation will be top priority. The GDP growth rate projections remain as stated at 8.5%, with a plus or minus difference of 0.5%," Mr Rao said. Mr Chidambaram has said in his statement that cutting taxes and thereby borrowing more to finance expenditure will also prove to be inflationary in future.