India must tighten monetary policy: Bimal Jalan

The Reserve Bank of India (RBI) was needed to drain cash from the economy to check speculation in commodities, former Governor Bimal Jalan said, after food price inflation climbed to an 11-year high this month.

“Reduction in availability of money may help in reducing the speculative pressure on retail prices,” Jalan, who headed the central bank between 1997 and 2003, said in an interview. “Monetary policy could give a signal that it is worried about inflation.”

RBI Governor Duvvuri Subbarao said he discussed the country’s economic situation with Finance Minister Pranab Mukherjee on December 18, fuelling expectations he may tighten monetary policy soon. Bonds and stocks fell today, extending their decline from last week on concern the central bank may raise interest rates.

“The market has begun to price in a monetary policy action in the near term to anchor rapidly escalating inflation expectations,” said Shubhada M Rao, chief economist at YES Bank Ltd in Mumbai.

The 10-year government bond yield, which rose 14 basis points last week, gained 2 basis points to 7.74 per cent at 4:15 pm in Mumbai today. The key Sensitive stock index fell 0.7 per cent to 16,601.20 on the Bombay Stock Exchange, sliding 3 per cent since December 14.

Surging food price
Food prices are rising after the June-to-September monsoon rains, the main source of irrigation in Asia’s third-largest economy, were the weakest this year since 1972, hurting output of rice, pulses and wheat.

Production of monsoon-sown rice may total 71.65 million tonnes (mt) this year, less than the 84.58 mt reaped a year ago, according to government estimates. Sugar crop in India, the biggest grower after Brazil, fell 9.6 per cent in the first two months of the season that started October 1 to 1.7 million tonnes from a year ago.

An index of food articles compiled by the commerce ministry advanced 19.95 per cent in the week ended December 5, the highest since December 1998. India’s key wholesale-price inflation accelerated to 4.78 per cent in November from a year earlier, following a 1.34 per cent gain in October, the ministry said.

“You don’t need a stark action because inflation is confined to food prices,” said Jalan. “According to one school of thought, some indicative monetary action is worth considering, a mild one.”