'Tight monetary stand must to combat inflation'

Prime Minister’s Economic Advisory Council Chairman C Rangarajan today said, to control the demand pressures interest rate has to be raised. Commenting on the IIP numbers that fell to 3.6 per cent in February, he said, the situation will turnaround next fiscal.

He also maintained that inflation should come close to 7 per cent and said there should not be any cap on Foreign Institutional Investors’ (FII) inflow.

After launching Indian Bank’s 24-hour e-Banking Lounge, debit cards for senior citizens and inter-bank mobile payment services in Chennai today, Rangarajan said, “March figures have shown some decline and by April-May it (inflation) should come closer to 7 per cent.”

Since food price inflation has persisted for a long time, it has also extended to the manufacturing side which is why the overall inflation is not falling as fast as it was expected. But the food price inflation should further come down since the wheat crop is looking good. As the wheat crop comes into the market, foodgrain prices should fall.

“As long as the inflation rate remains high, the monetary policy must continue to remain tight and move from the present stance only when inflation shows a strong decline.”

Speaking of a lower than expected data, he said, “IIP has been showing some improvement over the previous months and we are having some impact of the base effect. For the year IIP should be about 8 per cent.”

The IIP numbers, released this week, showed industrial growth slowing to 3.6 per cent in February 2011 as compared to an expansion of 15.1 per cent in the year-ago period.

This was due to slippages in performance of capital goods and basic goods sector, though consumer goods sector continued to post good results.

Responding to a question on whether there should be a cap on FII flow into the country, Rangarajan said, “FIIs are coming back and inflows are now moderating. A cap is required when the inflow is large. At this time, I am not thinking of putting any cap on FII (foreign institutional investment) inflows.”

On the deregulation of diesel prices, he said, “There will be some policy action with regard to petroleum prices and it may be freed from government control next fiscal.”

The proposed move would lead to dismantling of the administered price mechanism (APM). It may be noted, the government on June 25, 2010, deregulated petrol price and said the same Would be done for diesel soon.