Mumbai: Anchoring inflation expectations and containing overall prices have become “imperative”, Reserve Bank of India (RBI) said in a report on Thursday, as annual wholesale price inflation hovered near 10%.
The first-ever report on Financial Sector Stability comes after the RBI raised key rates by 25 basis points last Friday, a month earlier than expected, with another increase seen at its policy review on 20 April.
“Even as food prices are showing signs of moderation, they remain elevated. More importantly, the rate of increase in the prices of non-food manufactured goods has accelerated,” the central bank said in the report.
Government data released earlier on Thursday showed food inflation stood at 16.22% in mid-March, easing for the third straight week as new winter harvested crop reached the market.
Wholesale price inflation (WPI) was almost 10% in February, sparking off street protests and prompting action from the RBI.
India should aim for annual inflation at 5% and try to lower this for economic growth to benefit the broader population, the Planning Commission said in an internal document obtained by Reuters.
The RBI also said in the report that management of the government’s gross record market borrowing programme of Rs4.57 trillion($100.4 billion) will be a challenge in 2010/11, although net borrowings are projected to be lower than FY10.
The fresh supply that hit the bond market in 2009/10 were lower than the actual net amount as the central bank used tools such as bond buybacks and unwinding of market stabilisation scheme bonds.
Due to the limited availability of these tools in 2010/11, the market would be faced with larger supplies.
The 10-year benchmark bond yield rose one basis point to 7.87% following the release of the RBI report as the market felt the tone of the report was “hawkish”. It had closed at 7.85% in the previous session.
The large borrowing along with growing inflationary pressures, could likely push up bond yields and raise banks’ cost of funds, the report said, adding that the Indian banking sector would stay “broadly healthy”.
Higher bond yields also have the potential to raise the cost of borrowing for the corporate sector and that constitutes a risk for economic recovery, the central bank said.
“Downsizing the government borrowing programme becomes critical, so as to help sustain a moderate interest rate regime. However, the exit strategy from fiscal support requires to be modulated in accordance with the evolving macroeconomic developments,” the RBI said.