Despite recent easing of food prices, inflationary pressures remain high in India calling for more steps from policy-makers but with due caution such that economic recovery is not harmed, the central bank said Thursday.
“Inflationary pressures have intensified beyond the baseline projections of the Reserve Bank of India and there is risk of supply-side pressures translating into a generalised inflationary process,” the apex bank said in a report.
“More importantly, the rate of increase in the prices of non-food manufactured goods has accelerated. Furthermore, increasing capacity utilisation and rising commodity and energy prices are exerting pressure on overall inflation.”
Accordingly, the central bank, in the first Financial Stability Report, has called for further steps to anchor inflationary expectations and containing overall the overall price rise in a bid to lessen the burden on citizens.
“There is also a widespread consensus that it is appropriate to sequence the exit in a calibrated way so that the recovery process is not hampered and inflationary expectations remain anchored.”
The report said, some steps had already been taken, such as a hike of 25 basis points each in repo and reverse repo rates, which hikes the cost of borrowing for commercial banks and makes it more lucrative for them to park funds in government bonds.
“But the recent industrial production data suggest revival of private demand, which could potentially add to inflationary pressures. Some moderation, though, may be expected on account of the base effect in the coming months,” the report said.
The purpose of financial stability reports, in general, is to identify at an early stage any vulnerability that could potentially lead to a crisis in the financial system and to recommend policy measures to address such vulnerabilities.
The central banks of Britain and Sweden were among the earliest to introduce a financial stability reports in 1997 and global level institutions such as the International Monetary Fund (IMF) also publish periodical reports on the subject.
In the report, the Reserve Bank of India expressed optimism over India's overall financial stability as the banking sector continues to be healthy and well capitalised and with no undue credit risks.
“The financial infrastructure remains robust and markets well functioning. The level of foreign exchange reserves and predominant domestic investor base in sovereign debt provide a cushion against possible external sector shocks.”
The report came on a day when India's annual food inflation, based on wholesale prices, fell marginally to 16.22 percent for the week ended March 13 from 16.3 percent for the week before even as prices of lentils, fruits and vegetables moved up over the past week.