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RBI warns of inflationary pressures

The Reserve Bank of India warns against upward pressure on inflation because of high global crude and food prices, reports Gaurav Choudhary.

business Updated: Jan 28, 2008 23:26 IST
Gaurav Choudhary

The Reserve Bank of India on Monday warned against upward pressure on inflation because of high global crude and food prices, and said a possible recession in the United States posed policy challenges for India.

Inflation has fallen from a high of 6. 7 percent about a year ago to 3.8 percent now because of monetary tightening and duty cuts by the government, but the prevailing rate, analysts say, is misleading as the government has not allowed oil marketing companies to increase retail prices of petrol and diesel.

“Since pass-through of higher international oil prices to domestic prices remains incomplete, inflation has remained suppressed,” RBI said in a customary economic review released on the eve of its quarterly monetary policy. “Elevated international food prices also pose potential inflationary pressures in the period ahead,” the review said.

Domestic prices of petrol and diesel have remained unchanged since February 2007, although international crude prices (Indian basket) have increased almost 56 per cent from $56.6 per barrel then to $88.2 by December, the review said.

Kerosene and LPG prices have also not been raised since April 2002 and November 2004, respectively.

The government is expected to decide on raising the prices of petrol and diesel early next month. State-owned oil marketing companies are losing Rs 340 crore a day in potential revenues because of the delay in revision of petrol and diesel prices.

The petroleum ministry, in its presentation before the Group of Ministers headed by external affairs minister Pranab Mukherjee, has pointed out that oil companies had been posting profit for the past three years largely on account of support from oil bonds and upstream discounts and sale of shares. They are now “heading for liquidity crisis and borrowings have increased rapidly,” it said.

The RBI also said that the downside risks to economic growth in the US are becoming increasingly more pronounced in the wake of likely softening in consumer spending due to higher energy prices, lower equity prices and housing downturn.

Business investments in equipment and software as well as non-residential construction are also expected to slow down.

The United States Federal Reserve announced a 75 basis-point cut in its benchmark rate, the biggest single cut in 25 years, last week to provide stimulate the economy that is facing a recession.

The money and credit markets in India have so far remained relatively insulated from the international financial market developments. “The policy challenge is to continue to ensure financial stability in India during the period of heightened uncertainties, while maintaining the momentum of high growth and ensuring price stability,” the RBI said.