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Price prick spoils mood
Inflation outlook keeps RBI worried

Mumbai, Aug. 30: The Reserve Bank is apprehensive that the global hardening of oil prices will rub off on the country’s priceline.

“Considerable uncertainty surrounds the short-term movements in international crude oil prices, which could influence the domestic inflation outlook,” the central bank said.

“The outlook for headline inflation is, on current indications, less optimistic than what was envisaged at the beginning of the year,” the RBI said.

Headline inflation — a monitor for year-on-year changes in wholesale price index — was predicted in the central bank’s annual credit policy statement in May 2004 to be “around 5.0 per cent”.

In its annual report today, RBI said, “Price pressures could be a cause of some concern, though it remains to be seen how the imported price shocks would evolve globally and be absorbed locally.”

Recent inflation figures show that the trend is petering down with Union finance minister P. Chidambaram stating over the weekend that inflation rates will be moderate.

The RBI, however, prefers to adopt a cautious stand in its annual report.

On the monetary policy, the RBI said there is a need to consolidate the gains obtained in recent years from reining in inflationary expectations, given the volatility in the rate in 2003-04 and subsequent spikes in headline inflation in 2004-05. Sustained efforts have helped to build up confidence in price stability, it added.

Inflationary expectations can become adverse in a short time if noticeable upward movements in prices continue. While the economy has the resources and the resilience to withstand supply shocks, the consequences of continued abundance of liquidity need to be monitored, the RBI said.

The RBI feels that the inflationary situation needs to be watched to respond quickly but in a measured manner. “There is no room for complacency,” the RBI said. Maintaining confidence in price stability is a continuing policy objective, it added.

Refusing to bring its guard down, the RBI said the inflation environment needs to be monitored closely on a continuous basis for any unforeseen developments either in the global or in the domestic front to consider appropriate prompt and measured responses. Apart from “pressures from international prices on domestic inflation”, RBI said fuel prices would hold the key to the overall inflation outlook.

According to the RBI, liquidity would also need to be carefully monitored as it can pose demand pressures on prices. Bankers are, however, wary of this statement as they feel that money will be sucked out of the system to rein in expenditure.

Inflation is also determined by the “progress of monsoon after taking into account the shortfalls and uneven spread of rainfall in July, which is the sowing month of the kharif season”.

“Domestic iron and steel prices continue to remain at elevated levels, even though international prices have plateaued,” the RBI said.

On interest rates, the RBI said domestic rates are likely to be impacted with the northward movement of international rates and financial markets would have to manage these challenges.

As activity is picking up globally and inflation is rising across the economies, several central banks have raised their key policy rates, the RBI added. A reversal of existing ample international liquidity conditions would impact domestic financial markets, the central bank warned.

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