Lower inflation goal to curb price rise: Reddy

Reserve Bank of India Governor Y V Reddy today said the lower inflation limit of 4.0-4.5 per cent set for the medium term is expected to impact inflation expectations and reduce the socially tolerable price rise rate.

The inflation rates since the second half of the 1990s have been, by and large, benign, despite sustained external capital inflows and surge in fuel prices.

The RBI's endeavour would be to contain inflation close to 5.0 per cent in 2007-08, Reddy said in his speech at the Metropolitan Chambers of Commerce and Industry,

Dhaka. Prior to cutting the target to 4-4.5 per cent, RBI's tolerance range for inflation was maintained at 5-5.5 per cent. The inflation rate based on the Wholesale Price Index (WPI) declined to 5.66 per cent for the week to April 29 (5.77 per cent in the preceding week) entirely due to higher statistical base.

Besides the social angle, the scaled down limit for inflation takes into account the integration of Indian economy with the global economy. This (reduced range) would also be conducive for maintaining self-accelerating growth over the medium-term, he said.

The Indian economy's growth rate for 2007-08 put at 8.5 per cent, reflects average rainfall, expansion in industrial and services sectors and deceleration in global growth by 50 basis points in 2007, the governor said.

India's external sector has become resilient, with the current account deficit being maintained at very modest levels and recent trends expected to continue to shape the outlook for the balance of payments.

On the whole, the overall trade and current account deficits in 2007-08 are expected to be adequately financed by the expected net capital inflows in 2007-08, Reddy said.

Taking into account the high expansion of money supply worldwide, and the monetary overhang in 2005-07, the monetary expansion should be contained at around 17.0-17.5 per cent in 2007-08, in consonance with the outlook on growth and inflation, he said.

RBI has placed aggregate deposit growth in 2007-08 at around Rs 4,90,000 crore and a graduated deceleration of non-food credit to 24.0-25.0 per cent in 2007-08 from the average of 29.8 per cent over 2004-07.

FATE FACTOR

Inflation expectations well-anchored

Trying to moderate credit expansion

RBI believes in gradual process of fuller rupee float

Capital flows can easily reverse direction

Aim of M3 growth of 17-17.5% aim in line with GDP, inflation outlook

India's GDP growth is domestic consumption driven

Capital flows to finance FY08 trade, current account gap