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Updated: August 1, 2010 23:13 IST

Inflation a major worry for policy makers

C. R. L. NARASIMHAN
Comment (5)   ·   print   ·   T  T  
BRAINSTORMING: Bankers coming out of the Reserve Bank of India, Mumbai, after last week's credit policy meeting. Photo: PTI
BRAINSTORMING: Bankers coming out of the Reserve Bank of India, Mumbai, after last week's credit policy meeting. Photo: PTI

In its recent review of monetary policy, the Reserve Bank of India has listed high inflation as its foremost concern. Even as food price inflation and, more generally, consumer price inflation are showing some moderation, they are still in double digits. Non-food inflation is on the rise and demand side pressures are clearly evident.

Economic growth, however, is getting consolidated fast in India and is becoming broad-based. In fact there are increasing concerns over capacity constraints emerging in a wide range of sectors. The RBI puts it succinctly: “With growth taking firm hold, the balance of policy stance has to shift decisively to containing inflation and anchoring inflationary expectations.'' Amplifying that policy stance, the RBI makes the following points.

WPI inflation has been in double digits since February. Headline inflation was 10.6 per cent in June 2010. This was higher than the 10.2 per cent recorded in May. Inflation figures for March and April were revised upwards. There is a strong possibility that the revised data for May and June will reveal higher inflation than earlier estimates showed.

Second, price rise in primary food articles continues to be in double digits. Non-food manufactured products inflation (which has a substantial 52.2 per cent weight) has risen from (-) 0.4 per cent to 7.3 per cent. Non-food items inflation (WPI excluding food products and food articles), which was near zero in November 2009, rose sharply to 10.6 per cent in June. Significantly non-food items contributed over 70 per cent to WPI inflation. This suggests that inflation has become much more generalised.

Baseline projection

Three, despite some moderation, consumer price inflation remains in double digits. The central bank's baseline projection for WPI inflation for March 2011 has been raised to 6 per cent from the 5.5 per cent indicated in the April policy statement. A number of developments since April have influenced the RBI. There has been an increase in prices of many administered/regulated items. Petroleum products, for long subject to administered prices, have been partially deregulated. The immediate impact will be about one percentage point rise in WPI inflation, assuming global oil prices remain stable.

The near term outlook for inflation will be conditioned by a number of factors. The spatial and temporal distribution of rainfall in the remaining period of the south-west monsoon is one critical factor. A good kharif harvest will dampen inflation over the short-term. Other important factors that have a bearing on inflation are the levels of oil and other commodity prices globally. Idle global capacity in a number of sectors can facilitate imports at competitive prices. However, strong growth in India has pushed up demand side pressures.

Growth revised to 8.5 %

The RBI has revised its growth projection for the current year to 8.5 per cent, up from the 8 per cent with an upward bias indicated in the April policy statement. This is in line with all recent official forecasts. The Prime Minister's Economic Advisory Council had just a few days earlier forecast an identical growth rate. According to the RBI, the main risks to growth will emanate from abroad. With weak recovery in the industrialised countries, the performance of countries such as India will be affected. A more significant risk is from a potential slowdown in capital inflows. India's current account deficit has widened. Robust domestic growth drivers have pushed up imports widening the trade deficit.

Capital inflows have played a crucial role in the balance of payments. If due to increased risk aversion capital inflows decline the comfortable buffer between inflows and current account deficit will be narrowed. Lower inflows may also constrain domestic investment, which is critical to achieving and sustaining high growth rates.

On the other hand, given that central banks in the advanced economies are likely to continue with accommodative monetary policies, flows to emerging markets in search of higher return may increase. Large capital inflows beyond the absorptive capacity of the domestic economy will however pose a challenge for monetary and exchange rate management.

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Narrowing the liquidity spreadAugust 1, 2010

There are millions in India who can't have meal more then once a day, just because of rising prices. Mr.Sharad Pawar must undertake some innovative steps or else retire.

from:  gaurav
Posted on: Aug 18, 2010 at 17:22 IST

Yea we should absolutly learn from advanced cultures that how to overcome the inflation disease.!
These hike in prices related core like petroleum,non manufactured products results in overal inflation wich in turn being faced by indians.

from:  Nishe
Posted on: Aug 3, 2010 at 16:25 IST

It could be said that controlling inflation with monetary policy may work when inflation is milder and not severe, i.e in single digits not double digits. Monetory policy is quite uncertain in effects and can cause lot of damage to businesses depend on bank credit. Cause for inflation is price rise. simple. Cause for price rise is not money supply alone which the monetory policy is targetting. When money supply tap is closed it would be the small and medium businesses which will suffer. Reason: Small and medium businesses depend on bank credit and not FDI.

Big businesses have complete freedom in their money supply hence advocate monetory policy which will not affect their businesses. They depend on FDI and if that does not work out they could always raise the prices of their products. To control arbitrary price rises there should be some sort of control on profit, or profit margins or how much the private company executives (and employees) pay themselves. This is not the mandate of RBI but one for government.

Sure RBI is trying its best but we should be using fiscal policy i.e budget, adiminstered price system, price controls etc along with tax policy with higher taxes for high earners. Monetory polilcy is limited in its scope in controlling severe inflation as the one we are facing. Perhaps we could start with controlling the price of petrol.

Good luck for RBI for its efforts.(my opinion: it is unlikely to work)
Tough luck for People of India.
Governement, you have an excuse; it is the fault of RBI

from:  barani sambandan
Posted on: Aug 3, 2010 at 01:42 IST

the very good insight of inflation in the current vegue situation,

from:  zahid
Posted on: Aug 3, 2010 at 01:18 IST

The bubble is inflating in India. Why not we learn experience of other countries and foresee problems and solutions. We run when it goes beyond control. Surprising.
Look at the prices in construction business,durable goods washing machines,air conditioners,cars etc. Look at their profiteering besides food and other consumer items. There has to be 'Freeze"on prices of some items.

from:  ashok
Posted on: Aug 2, 2010 at 02:59 IST
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