High food inflation may prompt RBI to reduce liquidity: PMEAC

The Reserve Bank may start sucking out money from the system to combat inflation, but this depends on how food prices move this month, the Prime Minister's Economic Advisory Council said today.

Food inflation as of the third week of November shot up to 17.47 per cent.

"RBI could take action after watching the behaviour of prices in December to restrain liquidity... The RBI might start by reducing the liquidity in the system," PMEAC chairman C Rangarajan told reporters on the sidelines of a FICCI seminar.

RBI would come out with its quarterly review of the monetary policy in January.

He added that though food inflation must be primarily handled through supply management, there is a role for monetary policy as well.

"In the period of scarcity if the money supply growth is very strong it will also aggravate the food inflation," he said.

Food inflation rose to 17.47 per cent for the week ended November 21 against 15.58 per cent in the previous week, while overall WPI inflation doubled to 1.34 per cent in October compared to 0.50 per cent in the previous month.

The RBI has projected that the wholesale price inflation would rise to 6.5 per cent by end of this fiscal.

Rangarajan added that in the coming days, both fiscal and monetary accommodative policies may have to be withdrawn slowly amid high fiscal deficit and rising inflation, particularly food inflation.