Amid projections that inflation could touch the double-digit mark, the Prime Minister's advisory panel on Thursday said it could fall to 7 per cent by fiscal-end.
Noting that food prices - which have pushed inflation to 7.31 per cent for December - are likely to ease in the coming months, PMEAC chairman C Rangarajan told PTI that RBI should take some money control measures to tame the rising prices.
"Going forward, there could be some decline in food prices. The inflation is likely to be around 7 per cent by March-end," he said.
He added that food supply also needs to be augmented. Rangarajan's comments assume significance in the backdrop of the Reserve Bank's quarterly monetary review on January 29.
His optimism is in contrast to alarming projections given by analysts. Global financial services firm Citi said "if the uptrend seen in fuel and metals continues, inflation could enter the double-digit range in the coming months, possibly resulting in sterner monetary action." HDFC Bank economist Jyotinder Kaur said inflation is likely to touch 8.5 per cent by March-end.
Standard Chartered Bank's economist Anubhuti Sahay echoed Kaur. Rangarajan said the rise in inflation is mainly because of the increase in prices of food articles, which is largely due to supply shortfalls.
"We have to ensure that availability of food grains should be enhanced. Some monetary action is also called for, particularly for reducing the liquidity in the system," he said.
Rangarajan expected the RBI to take back some special refinance facilities from the system. "I expect RBI to withdraw the special refinance facility in its policy review."
The RBI has projected inflation to be around 6.5 per cent by this fiscal-end. Faced with credit squeeze in the economy following the world financial crisis that broke out in September 2008, the Reserve Bank had offered refinance facility to various sectors of the economy.
There is a liquidity adjustment facility offered by the RBI where banks can park their excess liquidity.
In normal times, it is about Rs 40,000 crore (Rs 400 billion). Now it is running at about Rs 1,00,000 crore (Rs 1 trillion). In its last review, the Reserve Bank had withdrawn some of the special liquidity facilities given to banks to meet mutual funds' redemption requirements.
