"Inflation currently stands at uncomfortably high level.
Monetary and fiscal policies have to be appropriately tight to protect the economy from inflation," PMEAC Chairman C Rangarajan said while releasing `Review of the Economy 2010-11.`
He said the monetary policy has an important role to play and expects the central bank to continue with its measures to control inflation.
"There is a need to maintain tight monetary policy. We believe monetary policy has an important role to play," PMEAC said.
The RBI is scheduled to come out with its mid-quarterly review of monetary policy on March 17.
The central bank hiked its short-term lending and borrowing rates by 25 basis points during its third quarterly review last month to tame inflationary pressure. In 2010, the RBI raised the rates six times.
Meanwhile, the PMEAC revised upwards its inflation forecast for March-end to 7 per cent from 6.5 per cent estimated earlier.
On the prevailing high inflation, Rangarajan said, vegetable prices have began to normalise from the last week of January onwards.
"The headline rate on this count is expected to come down further during February and March 2011 to about 7 per cent," he said.
While the food inflation had touched 18.32 per cent in December, 2010, before moderating to over 11 per cent this month, the overall inflation still stood above eight per cent as against the comfort level of 4-5 per cent.
The PMEAC said further decline can be expected during first quarter of 2011-12 and the combination of appropriate policies can create conditions conducive to bringing back the economy to 5 per cent inflation level.
Referring to the external conditions like sovereign debt problem in eurozone, high global food and crude oil prices, the PMEAC said this once again underscores the importance of pursuing domestic policies that factors in some adverse development in international sphere.
"On the domestic front, the principal challenges in the short to medium term is inflation management. Both monetary and fiscal policy are integral to this," Rangarajan added.
On a query regrading the appropriate time to free diesel prices from government control, he said, "In my personal opinion, I think it could be done when inflation reaches 6 per cent."