India needs tight monetary policy to prevent food prices from spilling over to the broader economy, a top economic adviser said in a newspaper interview, ahead of a widely expected rate hike on Tuesday.
Chakravarthi Rangarajan, chairman of the prime minister's Economic Advisory Council, forecast headline inflation to ease to around 7 percent by end March, a level that is above the Reserve Bank of India's (RBI) comfort zone of 5-6 percent.
There is a case for policy to be tight because food inflation, persistent over a period of time, could spill over to other sectors of the economy, he told the Financial Express.
The RBI on Monday said inflation would likely stay high longer than earlier anticipated, reinforcing the likelihood it will lift interest rates by at least 25 basis points during its quarterly review, due at 11:30 a.m. (0600 GMT).
It is crucial for the central bank to signal its commitment to stamp down high inflation, Rangarajan said.
People ought to continue to trust the monetary authority for its commitment to fight inflation, he said.
If people in general and traders in particular get the impression that policymakers are comfortable even with a higher level of inflation, then it will be a very difficult situation.
A sharp rise in food prices has been stoking broader inflation and has sparked voter anger against the Congress party-led government, which faces crucial state elections it must win at the risk of the coalition unravelling.
But many government officials worry sharp rate hikes could hurt growth, projected at close to 9 percent in the year to March, and have advised caution in monetary policy.
The wholesale price index , the most widely watched gauge of prices in India, rose 8.43 percent in December from a year earlier, compared with 7.48 percent in November and well above the RBI's March-end projection of 5.5 percent.
Rangarajan said the current spell of inflation was due to problems like food production not rising quickly enough to keep up pace with population growth.
Some observers have said the central bank's demand calibration tools cannot solve an inflation problem that is supply-side driven.
Some moderation on the demand side is also called for, Rangarajan said.