Rising international commodity prices and consumer demand key threats.
The Reserve Bank of India (RBI) today said rising prices could impact economic growth in 2010-11 and this concern was compelling it to shift policy stance to manage inflationary expectations.
Inflation can be expected to moderate over the next few months, from the peak seen in recent months. Yet, factors like international commodity prices and rising consumer demand could push inflation up, it said in its Macroeconomic and Monetary Development Report released today.
The Wholesale Price Index (WPI) inflation, after remaining significantly subdued during the first half of the year, increased at a fast pace in the second half and reached 9.9 per cent by February 2010. It remained almost unchanged in March 2010.
The signs of inflationary build-up became pronounced in the fourth quarter of 2009-10. Talking note of the shifting conditions, RBI began to tighten monetary policy from January. It raised the cash reserve ratio, or the amount (in per cent) banks have to keep with RBI, by 75 basis points in the third quarter review. In March, it raised short-term policy rates (repo and reverse repo rates) by 25 basis points to anchor inflation expectations.
Dwelling on aspects that could push inflation up, RBI said first, international commodity prices, particularly of oil, started to rise. And, in several commodities, import options were limited due to higher international prices, RBI said.
Second, revival in private consumption demand and bridging of the output gap would add to inflationary pressures, it said. The return of pricing power with companies due to a strong revival in demand could also impact inflation.
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The gradual exit of fiscal stimulus measures would entail roll back of excise and Customs duty reliefs as well as measures to align domestic prices with international oil prices, it said, adding it might also give an impetus to inflation.
Finally, it is important to guard against the risk of hardening of inflation expectations conditioned by the near-double-digit headline WPI inflation. Inflation, as measured by consumer price indices, also remained high, though there was some moderation in February 2010.
“These inflationary conditions, coupled with the momentum in economic recovery, created a compelling ground for altering the Reserve Bank’s policy focus to anchoring inflation expectations”, it said.
Decline in agricultural production caused by the deficient South-West monsoon as well as increases in international price of crude oil largely conditioned the inflation path, RBI said. Indications of inflation becoming broad-based were evident from November 2009. Inflation in non-food manufactured products increased from (-)0.4 per cent in November 2009 to 4.7 per cent in March 2010.
While near-term factors corroborate the acceleration in inflation, some factors could help dampen inflationary pressures. The satisfactory rabi production and arrival of new crops in the market could improve supplies, it said.
Also, a normal monsoon migh translate into an improvement in agricultural production, RBI said.