Monetary measures in the offing to stem inflationary expectations

New Delhi, Jun 21 (UNI) The government today hinted that monetary measures are in the offing to check spiralling prices and claimed that the rate at which prices have been rising for non-fuel products has been coming down to touch an inflation rate between 5.5 per cent to six per cent a year from now.
"RBI Governor Y V Reddy has met Prime Minister Manmohan Singh and Finance Minister P Chidambaram this morning. The government will take appropriate action," Finance Secretary D Subbarao told anewsconference here.
Also present on the occasion was Chief Economic Adviser Arvind Virmani and other advisers to the Finance Ministry. A statement by Finance Minister P Chidambaram was distributed relating to the inflationary situation. Mr Subbaraorao, however, was not categorical as to whether there would be immediate cut in taxes, including petrol and petroleum products, to check the skyrocketing prices. He took recourse to a remark made by Mr Chidambaram's statementin which he said giving up revenues and borrowing an equivalent amount in the market in order to finance expenditure would also beinflationary. The Finance Minister had stated this while replying to a suggestion made by former Finance Minister Yashwant Sinha thatthe government could have made deeper cuts in taxes. "Nevertheless, I take Mr Sinha's suggestion on board and will explore the option," Mr Chidambaram said.
The Finance Secretary said he was not in a position to say as to what steps the RBI would take as it was an independent monetary authority. He said it was also for this very reason that he was unable to indicate as to when these steps would be announced. Mr Virmani claimed that the pace at which prices have been rising in non-fuel items has been coming down since March 2008 and projected the inflation rate to be in the region of 5.5 per cent to six per cent a year from now. He, however, said the headline inflation rate would continue to rise as a consequence of "a mathematical inevitable" due to the base year effect adding that 94 per cent of the weekly index rise of 11.05 was a result of increase in fuel and petroleum products.

Mr Viramani said the Finance Ministry sticks to its projections on the growth rate for the current fiscal which was 8.5 per cent, plus or minus 0.5 per cent. Mr Subbarao said the inflationary pressures are likely to continue for next few months. "The first line of defense is monetary policy action," he said.

Apparently, the response from the Finance Ministry mandarins came in response to scathing criticism all round, especially the political parties, as inflation touched a 13-year high of 11.05 per cent for the week ended June 7.
Rising prices have eroded the popularity of Manmohan Singh's ruling Congress party, which has lost ground in nine of 11 state elections since January 2007. The UPA faces elections in six more states this year and General Elections by May 2009. "The trend in prices is disturbing," Mr Subbarao remarked adding that these were truly difficult times as inflation had much to do with the global crude prices, which touched 144 dollars a barrel some days ago. ``Although demand is not part of the problem, demand management has to be part of the solution,'' Mr Subbarao said. ``There are limits to how much we can manage supply-side dimensions. So, much of the response has to be from demand-side measures.'' Analysts say the RBI's action could entail a hike in repo rate that is the rate at which Banks borrow from the RBI or hike in the Cash Reserve Ratio (CRR) rate to reduce the amount of cash in the banking system. The idea is to further drain excess liquidity.

The Central Bank raised its benchmark repurchase rate to a six-year high of eight per cent on June 11, the first increase in 15 months. The Bank has also increased the CRR twice since April 17 to drain excess money in the financial system. The government on June four reduced taxes on imports of crude oil and cut duties on other fuel products, foregoing revenue of the order of Rs 22,260 crore to cushion consumers from high fuel hike. Mr Subbarao said the trend in inflation in the coming months will be influenced by the price of crude oil, the rate of the dollar and the rupee- dollar parity.

Mr Chidambaram said the government will provide adequate wheat and rice stocks to moderate prices in the open market and will make provision for sufficent wheat and rice to the Public Distribution System (PDS). "Hence, there is no cause for worry regarding wheat and rice, "Mr Chidambaram said. The Finance Minister noted that there has been a record production of wheat and paddy and the government has adequate stocks of these two commodities. The government has procured 220 lakh tonnes of wheat so far and 260 lakh tonnes of rice. Mr Chidambaram felt that there was a silver lining as far as prices were concerned. In the primary article group, the index for food articles declined by 1.11 per cent. For the group as a whole, the index declined by 0.37 per cent. Even the manufactured productgroup registered only a small increase of 0.30 per cent. "Last evening, I called on the Prime Minister and had a long discussion with him. This morning, I invited the Governor RBI to meet me and we have reviewed the situation," he said. Mr Virmani said a rise in fuel prices was like a tax, leading todemand compression. Outside this, demand compression needs to be carefully worked out. Asked whether the era of double digiit interest rates was back, Mr Virmani said what matters in the long run is the real interest rates as compared to nominal interest rates. If in the long run, inflation rate is brought down then real interest rates would moderate.

When asked whether fuel prices would be hiked further if global crude prices continue to move Northwards, Mr Subbrao said this was a matter of political decision making and was thus not in a position to answer the question. He said investment prospects continue to be bright and the retained earnings of the corporates would not be impacted by inflationary expectations.