The signal for reversal of monetary policy stand by the Reserve bank will come only when inflation shows definite signs of decline, Prime Minister's Economic Advisory Council Chairman C Rangarajan said today.
He also said that high inflation over the last couple of years was due to supply side constrains but that did not mean that monetary policy had no role to play in such condition. Rangarajan was delivering the P R Brahmananda Memorial Lecture on 'Dynamics of Inflation' at a conference by the Indian Economic Association.
"It is true that the extraordinarily high level of inflation in the last three years was due to severe supply side constrains, particularly of agricultural products, but that did not mean that monetary policy or for that matter fiscal policy had no role to play in such conditions," he said.
The PMEAC chief added: "Food price inflation, if it persists long enough, gets generalised. Non-food manufacturing inflation has also remained high since April 2010 and at times crossed 8 per cent, despite a declining growth rate. Thus, monetary policy, alongwith fiscal policy. has to play part in containing overall demand pressures."
The changes in the monetary policy cannot have a direct impact on food inflation but it can have a moderating influence by containing demand pressure, he stated.
Maintaining that inflation level of 5 per cent is acceptable in the Indian context, Rangarajan said the present level was way above acceptable limit. It might take more than a year to bring it down to 6 per cent, he added. Rangarajan said: "The signal for reversal of the policy will be given when inflation showed definite signs of decline".
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