Gokarn hints at rate hike at RBI's Nov 2 policy review

The Reserve Bank today hinted at another round of monetary policy tightening at its upcoming review meet on November 2, with Deputy Governor Subir Gokarn asserting that it is a challenge to keep inflation in check.

"Persistent price increases in commodities for which there are less effective substitutes, with other things remaining equal, will raise the potential rate of inflation over a period of time. India's challenge is to keep inflation under check," Gokarn said while delivering a speech at the India Gandhi Institute of Development Research here today.

Inflation inched up to 8.62 per cent in September from 8.5 per cent a month ago -- well above the RBI's comfort zone -- on higher food prices.

Earlier during the day, Finance Minister Pranab Mukherjee, at an Economic Editors' Conference in Delhi, said, "I will try to bring it (inflation) down through whatever mechanism we have... It would be ideal if we have 4-5 per cent, but may be difficult. But I do feel that the annualised inflation rate would be around 6 per cent."

Food prices were expected to cool following a normal monsoon and improved supplies, but the continued upward spiral in prices has belied that optimism.

The RBI is widely expected to continue with policy- tightening measures at its review meeting on November 2, with a 0.25 per cent hike in key short-term rates on the cards.

The current inflation scenario is a cause for concern, as the inflation rate is well above the upper band of the comfort zone, he said.

India's annual food inflation slowed to 15.53 per cent in the first week of October from 16.37 per cent in the previous week.

"As regards food, the pressures in the Indian economy are predominantly domestic. Our Green Revolution in the 1960s raised the production of cereals dramatically, which increased availability and stabilised prices," Gokarn said.

"However, what we are seeing today is the impact of increasing affluence on the demand for a variety of food items that go far beyond cereals. As people become more affluent, their diets diversify," he added.

Blaming high food inflation on the changing food habits, he said there has been an enormous increase in the demand for various food items beyond cereals. The demand for high protein foods like pulses, milk, meat, fish and eggs has surged and so has the appetite for sugar, fruits and vegetables.

"A rise in income has increased the share of proteins in people's diet. Increasing demand for protein appears to be an inevitable consequence of rising affluence. Rising affluence has also led to an increase in demand for proteins and nutrition," Gokarn said, adding that one option to bring down prices would be to import pulses.