The money supply growth, which crossed 20 per cent in October-end, came down to 18.4 per cent on November 6. This is against the RBI target of 15.5-16 per cent year-on-year growth in money supply.

The Andhra Pradesh governor was delivering the keynote address at the conference on ``Money and Finance in the Indian Economy,'' organised by the Indira Gandhi Institute of Development Research in Mumbai.

RBI governor Bimal Jalan, who addressed the meeting after Rangarajan, however, did not respond to the latter's speech, which for the most part dealt on money supply growth.

Rangarjan's warning against risinginflation came in the wake of former RBI deputy governor SS Tarapore's outbursts against money supply growth last week. "If we wish to protect our economy from being buffeted, we have no option but to tighten the monetary policy in the very near future," Tarapore said.

Rangarajan, the moneterist, said that the monetary policy is best suited to achieve the goal of price stability. He said that while an increase in investment spending financed by money creation has a positive effect on output in the short term, in the long term prices rise at a faster rate.

"Moreover, there is an adverse external implication of this financing policy, as it leads to deterioration in the current account deficit in the balance of payments through import leakage and loss of competitiveness of exports."

Rangarjan warned: "This policy scenario implies that a high and disproportionate growth in money supply, whatever may be its origin, will in the long run worsen both the internal and external balance in the economy." He saidthat in the Indian context no one is advocating absolute price stability or even price increase of the order considered acceptable by the industrially advanced countries. "However, we need to have a fix on the acceptable level of inflation rate," he said.

Quoting various studies on the subject, the former RBI governor said that the relationship between prices on the one hand and income and money supply on the other is found to hold reasonably well over a period of time. Average of price changes over a period of four to five years are predicted with reasonable accuracy and these predictions fall within a range which should be a sufficient guide to policy.

"Seeking to find a direct year-to-year correspondence between changes in money supply and real income and the price level is a simplistic approach to the problem which overlooks the inherent lags in the functioning of an economy," he said.

INSIGHT
-- RBI endorses the view

Rangarajan's call for lowering money supply growth was echoed by theRBI itself, in its last monetary policy review. Consider what the RBI said then. "...there are several areas of concern in respect of current monetary trends in the economy. Money supply growth, attributable largely to growth in the banking sector's credit to government, is too high in relation to the expected growth of the real sector of the economy." The RBI added: "Although the price rise during the current financial year so far is largely concentrated on a few food items, there is no denying the fact that such a high rate of monetary growth is inconsistent with the objective of maintenance of general price stability. In this situation, a case could be made out for monetary tightening through measures, such as, increasing the interest rates or a further increase in the CRR."