Washington: With high inflation not expected to abate this year, a senior International Monetary Fund official said that the RBI should further tighten money supply to minimise the ripple effect of price rise. Kalpana Kochhar, Senior Advisor in the Asia Pacific Division and Mission Chief for India, said that the options available before RBI are to raise interest rates, use exchange rate mechanism to allow rupee to appreciate and give guidance to markets about future inflation rate.

"Our advice is to look past the first round of effects and try to minimise the second round effects of inflation. What this means is that, in the first round you have higher fuel and higher food prices... The so-called second round effects are when they spill over into wages and to other more general prices," she said. That is where the monetary policy has to play a role in terms of tightening to signal that the authorities are not going to allow the second round effects to become entrenched.

"In that sense, we do think there is further tightening to be done in India, notwithstanding the most recent interest rate increases with the repo rate increased from 8 per cent to 8.5 per cent," the IMF official said. The IMF official added that inflation is actually going to continue to rise, until about the end of this year because of a low base.

On using exchange rate, Kochhar said,"In countries where there is appreciating pressure, our advice is generally to allow the exchange rate to appreciate because it is an easy shock absorber for fighting inflation." The more appreciated the currency is, the cheaper the imports are and any given international oil price will translate to lower prices in domestic currency, she said. (PTI)