Pranab says central bank to decide on rate action

Deputy governor does not rule out rate change before policy review.

The government and the central bank on Tuesday appeared to be speaking in the same voice on possible monetary action.

While Finance Minister Pranab Mukherjee told reporters the central bank would take appropriate action on inflation, as and when needed, Reserve Bank of India Deputy Governor K C Chakrabarty reiterated that the possibility of monetary action before the next quarterly review in July could not be ruled out.

“Yes definitely. It (monetary action) can happen any time. It may happen before July,” Chakrabarty said when asked if RBI was considering a change in monetary policy to curb inflation. RBI’s next policy review is scheduled for July 27.

“This (inflation) is a concern. Inflation is always a concern, and it will remain a concern. At some stage, the monetary policy has to address the issue… This requires examination. After examination, if the governor comes to the conclusion that there is a need now, it will be done,” Chakrabarty told reporters on the sidelines of a function.

Data released on Monday showed that the headline inflation, measured by the wholesale price index, rose to 10.16 per cent in May from 9.59 per cent a month ago. The revised inflation rate for March rose to a 17-month high of 11.04 per cent.

Mukherjee yesterday told reporters in Patna that he did not favour a rate hike, though inflation was a major concern for the government.

Government bonds fell from the day’s high following comments from Chakrabarty and Mukherjee on likely central bank action.

Most economists are expecting that RBI will raise rates before the policy review in July. Tight liquidity in the system, which is expected to continue for a few more weeks, could, however, weigh on the central bank, they said.

Tight liquidity conditions have meant that short-term lending rates have increased by at least 25 basis points. State Bank of India and Allahabad Bank have increased deposit rates — for retail and bulk — by up to 125 basis points.

RBI has already increased policy rates and the cash reserve ratio since January to deal with rising inflation.