Rates may be hiked to tame price rise: Rangarajan

C Rangarajan, chairman of the Prime Minister's Economic Advisory Council suggested on Monday that the Reserve Bank of India could reduce money supply and raise interest rate to tame the rising prices of food articles.

"If price decline does not happen in December, then early steps could be taken. RBI could increase interest rates...preferably could reduce liquidity by acting on CRR," he said.

Rangarajan was responding to a question on what measures the RBI should take to moderate food inflation that climbed to a 10-year high of 20 per cent during the first week of December, driven mainly by higher prices of potato, other vegetables and pulses.

Making a case for reduction in money supply, Rangarajan, also a former Reserve Bank governor, said the apex bank could raise the cash reserve ratio, the portion of amount that banks are required to keep with the central bank.

Through a slew of measures, the RBI has injected liquidity into the system to help the cash-starved industry to combat the adverse impact of the global financial meltdown since September last year.

The RBI governor, D Subbarao had met finance minister Pranab Mukherjee on December 18, fuelling speculation that the monetary policy would be tightened.

The RBI in October had raised the statutory liquidity ratio, the portion of funds that banks are required to park in government securities, to 25 per cent, though it retained the CRR at 5 per cent.

The central bank would come out with its next monetary policy statement on January 29.