RBI hints at more action to curb inflation

Reserve Bank of India (RBI)Governor D. Subbarao on Tuesday did not rule out further monetary action tocurb inflation.

He said monetary steps may be warranted in the face ofsustained rise in food prices.

"The direct role of monetary policy in combating foodprice pressures is limited, but in the face of sustained high food inflation,monetary action may still be warranted to anchor inflation expectations,"he said while addressing the 25th annual conference of the Indian Society ofAgricultural Marketing.

The central bank has raised rates 13 times since March 2010,but it recently hinted at pause in rate hikes in the December policy ifinflation falls in line with the RBI's projected trajectory.

He felt the solution to high food prices lies in asupply-side response from the government.

"A lasting solution to food price pressures lies in asupply response that raises agricultural production and productivity, improvessupply chain management and sets the right incentive framework for bothproducers and consumers."

"The outlook on food inflation in the short to mediumterm will be determined by the speed and quality of such a supply response bythe government," he added.

He identified large increases in the minimum support pricesof foodgrain by the government to farmers as one of the reasons driving foodinflation.

He said shift in dietary habits towards protein-rich foods,pressure stemming from inclusive growth policies, shocks from global foodinflation, and financialisation of commodities were the other factors drivinghigh food prices.

"Inflation is a regressive tax and hurts the poor themost. The impact can be particularly severe in a country like India with apopulation of 1.2 billion, a per capita income of less than $1,500 and a largeshare of food in the total consumption basket," he said.

Subbarao said that the government's food for work programmeand proposed food subsidy bill had the potential to further raise fiscaldeficit and inflationary pressures.