RBI will act to counter inflation: FM

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Gaurav Garg

Student/Professionist

278 Points Joined February 2010

Finance Minister Pranab Mukherjee today said Reserve Bank of India (RBI) Governor D Subbarao would tighten monetary policy, if excessive consumer demand stoked inflation.

“He is keeping a watch on the demand side… And if it is found that the demand side needs to be taken care of, necessary adjustments will be made,” Mukherjee said during a debate on inflation in the Rajya Sabha.

The finance minister’s statement came hours after Subbarao said in Hyderabad that more monetary policy action was required to check rising prices, calling it the “first line of defence” against inflation.

The governor, who raised interest rates last week for the fourth time since mid-March, said consumer demand was strengthening in India and fanning prices.

“It is our duty to manage inflationary expectations. Now, as inflation gets more generalised and demand-side pressures build up, there is a need for monetary policy action,” Subbarao told reporters. The governor and the finance minister had met Saturday, four days after the policy, to discuss the inflation situation.

The wholesale price-based inflation was estimated at 10.55 per cent in June. According to the latest data released today, wholesale food inflation fell for the seventh straight week to 9.53 per cent for the week ended July 24, driven largely by the base effect. Inflation based on consumer price index for industrial and agricultural workers is close to 14 per cent, second only to Venezuela’s 32 per cent inflation rate, according to Bloomberg data. The Opposition parties had stalled Parliament over the issue of inflation. But unlike the last few weeks, when the finance ministry and RBI were involved in a duel over aspects related to say over financial stability and inter-regulatory coordination, the finance minister was all praise for the central bank today.

He told Parliament that RBI was setting rates to ensure that government borrowings and company investments did not get too expensive in the attempt to contain inflation. “The Reserve Bank is managing in such a way that one does not elbow out the other. And that is a very skillful exercise. I must appreciate the role that the RBI governor has played in the last year — there was no mismatch in the market and there was no crowding out in the market,” the finance minister said.

Replies (3)

Ayyswariya RG

Knowledge Seeker

3711 Points Joined June 2009

nice post. useful

Guest

Thanks for the info.

Raghav Toshniwal

student

450 Points Joined July 2010

i want to add here some lessons to be learned when dealing with inflation:

Your inflation game plan will be---

Don't rush to pay off your fixed-rate debt. Even at modest inflation rates, the payments on fixed-rate mortgages, auto loans and other debt get cheaper every year. If prices continue to accelerate, the mortgage payment that seems so monumental today will quickly start to feel like a bargain.

Beware of locking in low rates on savings. If inflation does return, you'll be sorry you bought long-term bonds or certificates of deposit at lower rates. Consider laddering your fixed-income investments, which means buying bonds or CDs with staggered maturities. If you have CDs maturing every few months, you'll be able to take advantage of higher rates should they come.

Get ready to substitute. Prices for different goods and services rise at different rates, which means savvy shoppers have opportunities to substitute relatively cheaper items for more-expensive ones. Eggs, for example, rose nearly 50% after Hurricane Katrina devastated many of the nation's poultry producers; price-conscious consumers ate more oatmeal for breakfast. All the ways frugal folks have traditionally found to save money become even more helpful as prices soar.
Weigh the cost of procrastination. Today's consumers are used to being rewarded for waiting. Delay buying that computer, for example, and you'll get a better, more powerful one for less next year.

In an inflationary environment, though, rising prices reward those who don't procrastinate.

Obviously, you'll want to keep living within your means, and you don't want to finance these purchases with variable-rate debt, like credit cards. But should inflation reignite, the scales will start to tip in favor of buying sooner rather than later.

♦ Get real. Investments in so-called "real assets" -- real estate, natural resources and commodities -- can help you hedge against inflation. Just don't go overboard, because these assets are notoriously volatile.

Regards