Inflation rate

RBI ANNUAL POLICY 2004-05/ GUEST COLUMNS - PRESSURE POINTS

The inflation rate continues to be a worry as oil prices globally have touched over $40 a barrel.

Moreover, with the monsoon likely to set pace earlier than the forecast, some crops might get affected. This would in turn put pressure on commodity prices.

In his November policy, the RBI governor had announced the need for prudent fiscal discipline by the Centre as well as the state governments to nullify the impact of the rising inflation on account of the article prices.

This means that the article price increase should not be fuelled by the increase in interest rates domestically which in turn could be triggered by rising fiscal deficit on account of fiscal imprudence.

In the last policy, the RBI had soothed the market saying, "the governor has made it clear that undue pressure on prices appears to be low on current indications. First, the good monsoon and expected recovery of agricultural production would have a favourable impact on prices of agricultural commodities. Second, the comfortable stocks of food grains and foreign exchange reserves would facilitate better supply management. Third, prices of fuel, power, light and lubricants will remain so far have remained in the absence of any renewed pressure on international oil prices, particularly in the wake of reduction of geopolitical tensions in the middle east. Fourth, both Money supply and reserve money growth have remained subdued."

On all four accounts, the RBI may have to take a relook.

Rising rates

Banks have been reaping the benefits of bumper treasury profits over the last few years as interest rates have been on a decline resulting in an appreciation of their trading portfolio.

Since 2002 the 10-year benchmark yield has declined by 223 basis points from 7.48/7.50 per cent to 5.21 per cent in 2004.

On a four-year scale, the fall in yield is close to 650 basis points as in October 2000 the 10-year benchmark paper yield was veering around 11.70 per cent.

However, the honeymoon with low rates may not last long as the latest US data on employment, consumer spending and manufacturing are signalling a recovery in rates.

The US Federal Reserve has already dropped hints for a possible rate hike. The US Fed rate is now at its four-decade old low of 1 per cent