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Inflation here to stay for a while: RBI

Inflation here to stay for a while: RBI
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First Published: Tue, Jul 29 2008. 12 12 AM IST

Central worry: The RBI office in New Delhi. The central bank said India’s budget deficit may come under pressure this year as the government boosts spending ahead of elections due by May. Photograph:
Central worry: The RBI office in New Delhi. The central bank said India’s budget deficit may come under pressure this year as the government boosts spending ahead of elections due by May. Photograph:
Updated: Tue, Jul 29 2008. 12 12 AM IST
Mumbai: The Reserve Bank of India, or RBI, said it doesn’t see any respite from rising inflation — already at a 13-year high — as prices of crude oil, a key contributing factor, aren’t likely to drop much from current levels.
The crude price, which touched $145.3 a barrel in July, has come down to $124.6 a barrel, but RBI does not expect it coming down further because of the “relatively tight demand-supply balance”.
Quoting the US Energy Information Administration, or EIA, the Indian central bank’s report on economy, released on Monday ahead of a much-anticipated quarterly review of monetary policy on Tuesday, said the crude prices are expected to remain at $127 a barrel until February, and this is a major inflationary risk.
Central worry: The RBI office in New Delhi. The central bank said India’s budget deficit may come under pressure this year as the government boosts spending ahead of elections due by May. Photograph: Harikrishna Katragadda / Mint
India did hike the prices of its heavily subsidized fuel in June, but that alone hasn’t fully taken care of the rise in international crude prices and, according to RBI, the “pass-through in case of administered petroleum products is still incomplete”.
The report on macroeconomic and monetary developments, a window to the quarterly review, doesn’t drop any explicit hint on the content of the Tuesday’s policy review, but some bankers and bond dealers say they believe RBI will continue to follow a tight money policy to fight inflation even though the trend in the bond and OIS, or overnight index swap, markets suggests otherwise.
The benchmark yield on 10-year bond, which rose to 9.55% early this month, has come down to 9.10%, and movement in OIS market, too, indicates status quo on the policy front.
In a 28 July report titled Asia’s Inflation Troubles, Sydney-based Sherman Chan, an economist with Moody’s Economy.com, responsible for country analysis of China, Hong Kong, Vietnam and India, said “inflation remains uncomfortably strong across Asia-Pacific region” and she expects RBI to raise the cash reserve ratio (CRR), or the cash that commercial banks are required to keep with the central bank, as well as its interest rate, on Tuesday.
Tushar Poddar, an economist with Goldman Sachs, too, predicts RBI will hike both its policy rate as well as CRR by 25 basis points each. One basis point is one-hundredth of a percentage point.
In its India Views report on Monday, Goldman Sachs said: “We expect RBI to continue the tightening bias but eschew more significant tightening.”
RBI has raised the policy rate by 75 basis points to 8.5% and CRR by 125 basis points to 8.75% since the beginning of this fiscal year to rein in rising inflation and growth in money supply that is stoking inflation.
The Monday RBI report spoke about some correction in asset prices, both equities and gold, but said the growth in money supply, or M3, bank deposits and non-food credit have all been higher than a projection made in its annual policy in April. These, economists say, strengthen the case for continuing with the tight money policy.
RBI also said India’s budget deficit may come under “pressure” this year as the government boosts spending ahead of elections due by May. Government finances will be hit by “higher oil subsidies and the burden of debt waiver to farmers”, RBI said.
A ballooning budget deficit may force the central bank to raise borrowing costs to prevent higher government spending from stoking prices.
Spending by India’s government registered a “sharp rise” in April-May, the first two months of the current fiscal year, according to RBI.
The government’s budget deficit target for this year is 2.5% of gross domestic product. It has kept an oil subsidy bill of more than $40 billion outside its accounts.
The result of RBI’s tight money policy is showing in the decline of business expectations index as corporations are expecting an increase in raw material prices and production costs.
According to RBI’s industrial outlook survey of manufacturing companies in the private sector for April-June, the business expectations indices, based on an actual assessment for April-June and on expectations for July-September, declined by 5.4% and 0.9%, respectively, over the corresponding previous quarters.
Corporations are less optimistic on the overall business situation, financial situation, production, order books, cost of raw materials, capacity utilization, employment, imports and profit margins than they were in the previous quarter.
According to the RBI survey carried in its report, most of the corporations expect to adjust the rise in raw material prices and the production cost by keeping inventory levels at “below average” and increasing prices.
Incidentally, industry lobby Confederation of Indian Industry’s business confidence index for April-September 2008 declined by 5.3% compared with the past six months, and 2.9% compared with the corresponding period a year ago.
The decline was on account of uncertain global economic outlook and concerns about high interest rates.
The RBI report also said a professional forecasters’ survey, conducted by the Indian central bank in June 2008, suggests moderation in economic activity for next three quarters and fiscal 2008-09 as a whole.
“Between the...survey conducted in March 2008 and...in June 2008, forecast of real GDP growth for 2008-09 was revised downward to 7.9% from 8.1%,” the RBI report said.
The central bank’s projection for growth in fiscal 2009 is 8-8.5%, and there has been no change in this yet.
For ‘Macroeconomic and Monetary Developments First Quarter Review 2008-09’, click here
Cherian Thomas of Bloomberg contributed to this story.
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First Published: Tue, Jul 29 2008. 12 12 AM IST