Inflation under 5%, but oil prices may hurt

ECONOMIC SURVEY 2005-06\ INFLATION

Price stability continues to be the main objective of monetary policy.

The rising and volatile global crude oil prices can impart an element of uncertainty to the inflation outlook and affect the investment climate in the country, though it has been benign at less than five per cent during the year 2005-06, the Economic Survey has said.

"This inflation uncertainty, together with the unresolved global macro-economic imbalances cast a shadow on the interest rate scenario. A continued firming up of global interest rates beyond a point poses the risk of dampening the domestic investment boom," it said.

The wholesale price increase in the year hovered below the 5 per cent mark compared with the average of 6.5 per cent for the previous fiscal due to sound macro-economic policies and effective management of supply and demand for essential items.

Keeping in mind the rising inflationary expectations, price stability continues to be the main objective of the monetary policy as the Reserve Bank of India hiked the reverse repo rate three times by 0.25 per cent each to reach 5.5 per cent on January 24 while the repo rate is pegged at 6.5 per cent.

Though the government has partially passed on the effect of increased fuel prices, it continues to be the main contributor to inflation this year, followed by primary products and manufactured products.

The average price of the Indian basket of crude petroleum shot up 44.5 per cent from $ 37.3 a barrel in April-November 2004 to $ 53.9 a barrel over the same period in 2005-06, forcing the government to effect a partial pass-through by hiking petrol and diesel prices twice in June and September 2005.

While the annual point-to-point inflation for primary articles increased to 5.7 per cent for the year 2005-06 compared with 1 per cent last year, annual inflation for manufactured products declined to 2.8 per cent this year compared with 5.4 per cent a year ago.

Supply shortfalls in commodities like onions and potatoes and increased demand for minerals led to an increase in inflation in primary articles while inflation in manufacturing articles declined significantly after the implementation of the value-added tax.