When the finance ministry seems to expect a pause in RBI’s monetary tightening cycle at the review later this month, the Prime Minister’s Economic Advisory Council (PMEAC) has reiterated that as long as inflation hasn’t come down to ?acceptable level”, the primary focus of the monetary authority must be on containing it.

Addressing an economic editors? conference here, PMEAC chairman C Rangarajan said, ?On looking back, I personally believe that perhaps sharper rate hikes earlier would have been more helpful in bringing down inflation.”

The RBI has been doing the right thing by raising interest rates, as is necessary to tame inflation, albeit in baby steps, he said.

The council also called for all possible ways of cutting down subsidies, including a hike in the price of diesel, without which it would be very difficult for the government to contain the Centre’s fiscal deficit at the budgeted level of 4.6% of the gross domestic product or GDP. Raising excise duty to pre-stimulus levels is another possible way of improving the state’s financial health, council believes. Petrol price was decontrolled in June last, but implementation of a similar decision on diesel has been kept in abeyance.

?Measures have to be taken, particularly with respect to subsidies, to retain fiscal deficit close to the budgeted level….Adjustment in diesel price has to be done at the earliest,? Rangarajan said, adding that this could be done when inflation starts declining. ?We cannot wait until it comes down to acceptable levels as it may be too late. It is a policy decision the government has to take,? he said. Oil marketing companies IOC, HPCL and BPCL are losing R67,000 crore a year on account of selling subsidised diesel.

Rangarajan said that wholesale price-inflation, that is near double digits for several weeks, is ?way above the acceptable level which is 4-5% in India’s case.? If food price remains high for a long time, it gets generalised and therefore, monetary policy should focus on containing inflation, said the former RBI governor.

The central bank, which has so far raised its benchmark lending rate 12 times in the last 18 months, is mostly expected to raise the rate by another 25 basis points on October 25 to tame inflation, recorded at a worrisome 9.72% in September. Rangarajan said that the impact of a good monsoon will be seen in food prices soon and by March 2012, WPI inflation will ease to 7%. Planning Commission Deputy Chairperson Montek Singh Ahluwalia who addressed the conference later in the day, said inflation is expected to come down to below 8% by March.

The PMEAC, which had forecast a (GDP) growth rate of 8.2% in July 2011, has now lowered it a notch. ?There are many factors which will require us to adjust it downwards. I expect that the growth rate in the current year will be close to 8%”, Rangarajan said. The PMEAC chief pinned his hopes on strong agricultural growth and steady services sector growth to offset a lower than expected industrial output growth. Industrial output grew at an anemic pace of 4.04% in August, a notch slower than its expansion a year ago, as mining output contracted and the overall demand and investment in the economy slipped into a low gear reflecting the bleak global outlook.

The council believes that since inflation is triggered by supply constraints, the state should ease supply bottlenecks, including stepping up imports.