Growth on track but prices may hurt again: RBI

Updated on Aug 30, 2007 09:42 PM IST

RBI feels that “inflationary pressures could potentially persist for several reasons”, reports BS Srinivasalu Reddy.

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Hindustan Times | ByBS Srinivasalu Reddy, Mumbai

Though the price levels seem to be benign at the moment compared to end-March 2007, the Reserve Bank of India (RBI) feels that “inflationary pressures could potentially persist for several reasons”. The concern stems from spiralling global crude prices and domestic factors like expansion of money supply.

“There are concerns regarding the further hardening of international commodity prices, in particular, oil prices.

Moreover, the possibility of inflationary pressures from domestic factors such as strong growth in monetary aggregates, elevated asset prices and large capital flows with implications for domestic liquidity conditions need to be recognised,” the RBI said in its Annual Report for 2006-07, released on Thursday.

The inflation measured by the Wholesale Price Index (WPI) had eased to 4.1 per cent by August 11, from 5.9 per cent at end-March 2007. The apex bank’s statement noted that its endeavour would be to contain inflation close to 5 per cent. The inflation figure for August 18, 2007 will be released Friday.

Domestic fuel group inflation turned negative (-2.1 per cent) reflecting cuts in domestic prices during November 2006 and February 2007. International crude oil (average) prices have, however, risen by around 28 per cent up to July 2007 from February 2007, when domestic prices were last cut, RBI said.

“Non-oil global commodity prices also remained firm led by food and metals. Various measures of consumer price inflation were placed lower in June 2007 (5.7-7.8 per cent) than those in March 2007 (6.7-9.5 per cent),” the RBI added.

Monetary expansion is still at its peak of 21.7 per cent, compared to 19.3 per cent a year ago, which remains a cause for concern, as the expansion surged to new peak despite the RBI’s efforts to curtail its year-on-year growth to 17 per cent.

Credit growth, which moderated to 23.6 per cent against 32.5 per cent a year ago, provided some relief, in turn easing asset-price pressures.

The RBI noted that the enduring strength of foreign exchange inflows complicated the conduct of monetary policy and identified it as one of the challenges for the policy.

However, it remained buoyant on the high economic growth at 8.5 per cent. “Steady increases in the rate of gross domestic saving and investment, consumption demand, addition of new capacity as well as more intensive and efficient utilisation/capitalisation of existing capacity are expected to provide support to growth during 2007-08,” the bank said.

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