India needs tight monetary, fiscal policies

Tuesday, 22 February 2011 00:00 -     - {{hitsCtrl.values.hits}}

(Reuters) - India needs tight monetary and fiscal policies to deal with high inflation, the prime minister’s top economic adviser said on Monday, warning the country’s budgeted fiscal and revenue deficits remain beyond their comfort zone.

C. Rangarajan, the chairman of the Prime Minister’s Economic Advisory Council, forecast fiscal deficit in the year to end March at 5.2 percent of the gross domestic product (GDP), lower than the budgeted 5.5 percent.

Rangarajan said he expected headline inflation to ease to 7 percent by March, from 8.23 percent in January, a forecast in line with other official predictions.

Inflation in India remains one of the highest in Asia despite seven rate hikes by the Reserve Bank of India (RBI) since last March and analysts expect another round of tightening when the central bank reviews policy next month.

Rangarajan said monetary policy would operate with a bias towards tightening, adding, inflationary expectations needed to be anchored to a 4-5 percent comfort zone.

Much of the current spell of price rise is blamed on supply-side constraints against which central banks have little defence, but Rangarajan said monetary policy played an important role in countering such inflation.