Re rise dampens inflation: Rangarajan

The policy actions and the large base effect from the previous year are expected to soften rising price trends, according to C Rangarajan, chairman, Economic Advisory Council to the Prime Minister.

The appreciating rupee also had a some dampening effect on inflation, Rangarajan told reporters on the sidelines of the Skotch Financial Technologies Summit today.

The rupee has risen by almost nine per cent against the US dollar since January. The appreciating rupee has made the import of commodities somewhat cheaper. The oil companies are able to buy more dollars with the same amount of rupee resources to import petroleum products, the analyst said.

He pointed out that with the softening of the inflation rate, the need for raising interest rates has gone away.

Inflation was also dependent on the monsoon and agriculture production, and if the sector witnesses 2.7 per cent growth, as in 2006-07, or higher in the present financial year, it would dampen the inflationary expectations, he said.

The economy, meanwhile, was showing signs of overheating, which is cyclical in nature, and capacities were being utilised even as the demand pressure persists in the economy, he added.

Responding to a query on the surge in capital flows, he said, "We have to be careful about how we can moderate capital flows. We should not send out wrong signals. But at the same time some kinds of capital flows can be discouraged".

Earlier, speaking on financial inclusion, he said the organised financial system has bypassed the poorest sections of the society. Farm households with less than one hectare of land have received very little credit from the banking system.

The Reserve Bank of India can use the incentive system to encourage banks to open branches in underbanked areas. Those banks opening more branches in underbanked regions could be given more licenses to set up branches in urban areas which are also important markets for them. "This incentive system should not be put as a condition, but work as a facilitating device", he said.