RBI optimistic on inflation front, but oil prices a worry

RBI optimistic on inflation front, but oil prices a worry
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First Published: Tue, Apr 29 2008. 12 51 AM IST

Updated: Tue, Apr 29 2008. 12 51 AM IST
Mumbai: The Reserve Bank of India (RBI) said on Monday that several steps taken by the government to contain prices are expected to help curb inflation, but that risks from high oil prices remained.
However, the statement made in the central bank’s report on macroeconomic and monetary developments cannot be interpreted as a hint that RBI will leave its key rates unchanged when it announces its annual monetary policy on Tuesday, as elsewhere in the 119-page report it said that it is important for monetary policy frameworks to allow for the possibility of a tightening even if near-term inflation remains under control.
“You will never know what RBI wants to do in its policy from this report. Historically, this has never given any clue (to the contents of the policy),” said a bond dealer who does not want to be identified.
MONEY MANAGEMENT (Graphic)
A day before the policy, the banking community is vertically divided on the likely measuers that RBI will take in its annual policy even as there is no debate on the stance of the policy. “RBI will be hawkish in its stance but it’s difficult to guess whether it will hike its policy rate or wait for some time before taking the decision,” said the chairman of a large public sector bank, who also does not wish to be named.
In mid-April, to fight inflation, RBI raised banks’ cash reserve ratio (CRR) which defines the amount of cash that commercial banks need to keep with the India central bank.
“The supply side pressures on global food prices do not appear to be abating, especially with the year ending global stock of major crops at historical lows,” RBI said in its pre-credit policy report.
According to the report, the government’s fiscal initiatives such as reducing the customs duty on rice, crude and refined oil and prohibition on exports of all edible oils and pulses and other measures would “help in containing inflation and inflationary expectations”.
The Indian basket of international crude oil prices increased by almost 76% to $99.3 a barrel level in March 2008 from $56.6 a barrel in February 2007, the bank noted. Inflation risks on account of oil prices “remain incipient”, it said.
Apart from the oil prices, manufactured products were the major driver of annual year-on-year wholesale price-based inflation, RBI said.
While price pressures have been coming largely from the supply side and RBI can do very little in this regard, especially at a time when economic growth is slowing, the report also referred to some demand-side pressures. For instance, domestic iron and steel prices saw a sharp increase in line with recent hardening in international steel prices while the rise in cement prices can be attributed largely to strong demand from the local construction industry.
This is also evident from the fact that business expectation indices in RBI’s latest industrial outlook survey are showing an upturn.
According to RBI’s industrial outlook survey of manufacturing companies in the private sector conducted in February 2008, the business expectations indices based on an assessment of the quarter ended March and expectations of the quarter ended June increased by 6% and 3.9%, respectively, over the previous quarters. The indices, however, declined by 3.8% and 3.4%, respectively, over the corresponding quarters of the previous year.
RBI said the performance of the manufacturing sector in the first quarter of 2008-09 was expected to be “considerably lower than that of the corresponding quarter of the previous year.”
The overall business confidence index (BCI), surveyed in December 2007 by the National Council of Applied Economic Research, for the next six months improved over the previous round of the survey but declined on a year-on-year basis.
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First Published: Tue, Apr 29 2008. 12 51 AM IST