The Reserve Bank of India (RBI) has favoured a de-regulation of diesel prices. In its third quarter review of Monetary Policy 2011-12, the apex bank suggested diesel price de-regulation “to contain aggregate demand and trade deficit.”
Since the food subsidy bill “is expected to rise,” the apex bank said, “it is prudent to fully de-regulate diesel prices.”
Reiterating its stand that inflation risks still persisted in the economy, the RBI pointed to “a large element of suppressed inflation” as domestic price of some administered products “do not reflect the underlying market conditions.” In this context, it singled out coal, which had not seen any increase in price this year. Any increase in coal prices “will have implications on electricity tariff,” it said.
Further, it said the “petroleum product prices have not been revised in response to crude oil prices, contributing to fiscal slippages and suppressed inflation,” the RBI said. While conceding that any revision in administered prices would add to inflationary pressures, it nevertheless argued that “such revisions are necessary to maintain the balance between supply and demand.”
Rate cut timing
The apex bank had made it clear that the cut in CRR (cash reserve ratio) “is a reinforcement of the guidance that the future rate actions will be towards lowering them.”
However, it added a rider when it said that “the timing and magnitude of future rate action is contingent on a number of factors.”
The RBI is indeed expecting some `policy and administrative actions' to facilitate it to go on rate reduction mode.
Fiscal slippages
Asserting that the high levels of consumption spending by the government would result in ‘fiscal slippages', the RBI said “This poses a significant threat to inflation management and, more importantly, to macro-economic stability.”
“Strong signs of fiscal consolidation, which will shift the balance of aggregate demand from public to private and from consumption to capital formation, are critical to create the space for lowering the policy rate without imminent risk of resurgent inflation,” the apex bank made it clear.
It also went on to indicate that it would “be constrained from lowering the policy rate” in the absence of credible fiscal consolidation.
The Reserve Bank of India felt the upcoming Union Budget “must exploit the opportunity to begin the process in a credible and sustainable way.”
