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Oil prices low but may still drive inflation: RBI

Oil prices are now ruling at just below 60 dollar a barrell compared to 76 dollars a barrell level in August.

india Updated: Oct 31, 2006 13:06 IST

Worried about the possibility of oil prices' pushing up inflation, the Reserve Bank on Tuesday said chances of prices going up in the coming days need to be viewed against this background.

"Despite recent easing, it will be prudent to presume that oil prices at currrent levels may still contain some elements of a 'permanent' component which is yet to be matched by full pass through," the apex bank said in its mid-term review of Annual Policy for FY'07.

Oil prices are now ruling at just below 60 dollar a barrell compared to 76 dollars a barrell level in August.

Further, RBI pointed out to quickening of domestic industrial activity and high international commodity prices and said that "it is desirable to watch for incipient pressures building up on prices."

The central bank has projected that Inflation, which is now hovering at over 5 per cent, would be in the range of 5-5.5 per cent in FY'07.

RBI maintained that the seasonal movements in prices of food articles also need to be monitored for the rest of the year given their "criticality for inflation perceptions and consequently inflation expectations".

The primary food article prices have been the key driver for inflation in the first half of this fiscal, along with crude oil which, however, has shown a declining trend now.

Warning of a possibly higher inflation toward the end of the fiscal, the RBI said that the positive base effect that had couched the impact of upside pressures on price changes so far could wear off by then.

Pointing out that the consumer prices for all categories have been rising through the H1 FY'07, Reserve Bank said that this reflects the impact of heightened primary product prices including those of essential commodities.

"The wedge between consumer prices and wholesale prices remains larger than before," the central bank said, adding that while fiscal and monetary measures have helped mitigate inflationary risks, there are reasons to be vigilant on this front.

According to the central bank, the outlook for inflation is more likely to be driven by demand conditions rather than by the strong positive supply side effects.

First Published: Oct 31, 2006 12:55 IST