RBI constantly watching oil prices

RBI voices concern as Govt has not raised fuel prices even though international prices have surged 10%.

The Reserve Bank of India governor said on Tuesday the RBI was constantly watching oil prices and policymakers needed to work out whether they thought higher global prices were permanent.

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The RBI surprised markets by leaving interest rates unchanged at its latest policy review in April, when many had expected it to raise rates.

"We are constantly reviewing the situation," RBI Governor Yaga Venugopal Reddy told Reuters ahead of the annual meeting of the Asian Development Bank in Hyderabad. "The point is, and I have been repeatedly saying this, that we have to come to a conclusion about the permanent component (of the oil price rise) over the medium term."

India, Asia's third-largest economy, imports 70 per cent of its annual crude oil requirements and any rise in global prices raises the prospect of a spike in domestic inflation.

The yield on the benchmark 10-year bond rose after Reddy's comments, to 7.48 per cent from 7.46 per cent beforehand.

Global oil prices are hovering around $74 a barrel, within sight of a record high of $75.35 struck in late April, mainly due to Iran's stand-off with the West.

The central bank is worried the government has not raised domestic fuel prices in 2006 even though international crude prices have surged by nearly 10 per cent.

Analysts say the government is likely to raise them after a round of state elections in May and that higher prices could build inflation pressures, prompting the central bank to raise interest rates later in the year.

The market was also unnerved by comments from Iran's Deputy Oil Minister Mohammad Hadi Nejad-Hosseinian, who said in New Delhi that global crude oil prices could exceed $100 a barrel by winter as supplies could not be increased in the short-term.