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Mumbai: India's central bank should raise interest rates to tame 16-year-high inflation, the finance ministry said, after the government handed out a 21 per cent salary increase to civil servants ahead of elections.
"Monetary policy has to focus on inflation," the ministry's Chief Economic Adviser Arvind Virmani said in New Delhi. "The political system doesn't tolerate inflation beyond a certain point."
The government is relying on the central bank to tame prices after Prime Minister Manmohan Singh's cabinet last week decided to pay more to 5 million civil servants than was recommended by a wages panel. Inflation jumped to 12.44 per cent this month as soaring food and fuel prices make life tougher for the poor in the nation.
"The government has put the ball in the Reserve Bank's court for inflation management," said N.R. Bhanumurthy, an econ-omist at the Institute for Economic Growth in New Delhi. The timing of the pay rise for state employees "coincides with elections nearby".
Forecast
The Reserve Bank of India last month raised its inflation forecast for the year to March 31 to 7 per cent from a previous target of between 5 per cent and 5.5 per cent, even after increasing its benchmark interest rate three times since June.
The central bank's key repurchase rate will rise to between 9.25 per cent and 9.5 per cent by the end of October from 9 per cent, according to eight of 12 economists surveyed by Bloomberg.
Inflation may accelerate further after Singh's cabinet approved a salary rise for government employees, backdated to January 2006. The Rs157 billion ($3.6 billion) cost of the pay increase in the financial year to March 2009 is almost twice the Rs79.95 billion recommended by a panel that reviews wages for civil servants every 10 years or so.
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