'RBI may take more action to combat inflation'

The Prime Minister's Economic Advisory Council has said that Reserve Bank of India may further tighten monetary policy in view of the persistent rise in prices and comfortable growth in factory output.

"RBI will take a view of the fact that inflation still persists at high level. If inflation level persists at double digit level for several months together, some action on the demand side is needed and some action on the part of RBI is required," C Rangarajan, chairman of PMEAC, told reporters.

To rein in prices, the RBI could tweak in policy rates to either suck out money supply or make borrowings costlier.

But with money supply being a little tight due to borrowings by telecom companies for spectrum and advance tax by corporates, analysts said RBI might go only for a hike in short term rates, leaving the money supply intact.

The Reserve Bank is slated to come out with its quarterly monetary policy on July 27. Industrial growth slipped to 11.5 per cent in May, from 16.52 per cent in the previous month, though the output recorded a double-digit growth for the eighth month in a row.

"The Index of Industrial Production figures do indicate some slight reduction in the rate of growth but on the whole I believe growth rate of industrial production will be closed to what we had achieved in the last year.

"I believe industrial production is still strong," Rangarajan said.

For 2009-10, industry grew by 10.4 per cent, up from 2.8 per cent in the previous financial year driven by spiralling prices of essential items, inflation surged into double digits at 10.16 per cent in May, the highest in the last 19 months.

It was at 9.59 per cent in April, according to provisional estimate. The final figure is expected this week.

The final inflation estimate during March was 11.04 per cent, up from the provisional figure of 9.90 per cent.

The Reserve Bank of India raised key short-term policy rates by 25 basis points in an unscheduled announcement earlier this month.

RBI had earlier increased the repo and reverse-repo rates by 25 basis points in April.