Few options left to control inflation | business | Hindustan Times
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Few options left to control inflation

Officials and experts said the only measures that can come now are from the Reserve Bank of India (RBI). Gaurav Choudhary reports.

business Updated: Jul 27, 2008 20:21 IST
Gaurav Choudhury

The marginal drop in the latest inflation rate — from 11.91 per cent to 11.89 per cent between the weeks ended July 5 and July 12 — may have renewed hopes that prices are finally coming off, but policy makers are keeping their fingers crossed as they are left with few options in case the trend reverses.

Officials and experts said the only measures that can come now are from the Reserve Bank of India (RBI).

“Fiscal measures are nearly exhausted because any new intervention will only make fiscal policy expansionary and compromise the efficient of monetary policy instruments,” said a government official, who did not wish to be named.

Inflation has remained close to a worrisome 12 per cent during the past few weeks, despite a series of supply-boosting measures from the government since the prices began spiralling earlier this year.

The official said fiscal and administrative measures including duty cuts, import through public sector companies and levy of export tax resulted in much lower pass-through of inflation on domestic consumers stemming from high global commodity prices.

“The fiscal measures have reduced the pass-through, but have increased the subsidy burden and might result in a higher fiscal deficit,” he said.

The government has targetted a fiscal deficit of 2.5 per cent of gross domestic product (GDP) in the current fiscal year (2008-09).

“Most of the new measures would now come from the RBI although falling crude oil prices, if it sustains, could provide some cushion to the government,” said DK Joshi, principal economist of credit rating and consulting firm Crisil.

Analysts believe while inflation containment is a priority for the RBI, it also faces the challenge of keeping money supply growth in control in a rising domestic interest rate regime.

The RBI has hiked the cash reserve ratio (CRR) — the mandatory proportion of money banks have to park with the central bank — 11 times or 3.75 per cent since December 2006 to suck out excess liquidity from the system. CRR now stands at 8.75 per cent.

The repo rate, the benchmark short-term lending rate, has been increased twice since March 2007 and now stands at 8.50 per cent.

A rise in repo rate has increased domestic interest rates, but widened the difference between domestic and overseas borrowing rates resulting in greater capital inflows and money supply growth.