<b>Credit Policy</b>: FY08 inflation target 5%

The Reserve Bank of India (RBI) in its Annual Policy Statement for the Year 2007-08 has placed greater emphasis on price stability and well-anchored inflation expectations while ensuring a monetary and interest rate environment that supports growth momentum.

"There will be a swift response with all appropriate measures to all situations impinging on inflation expectations and the growth momentum.
Inflation is to be contained close to 5% during FY08. Going forward, the resolve is to condition policy and perceptions for inflation in the range of 4.0-4.5% over the medium term," the policy said.

"International foodgrains prices, in particular, wheat and maize, scaled record levels in 2006 as global cereal output fell by 2.7% from the previous year," the policy added.

Globally, headline inflation has picked up in the wake of increase in commodity prices, and core inflation has also generally remained firm, which is likely to pose risks to inflation expectations as international crude prices have started rising again, the policy said.

"A significant worrisome feature of domestic developments in FY07 is the firming up of inflation, which represents the key downside risk to the evolving macroeconomic outlook. The recent hardening of international crude prices has heightened the uncertainty surrounding the inflation outlook," the policy said.

"A careful assessment of the manner in which inflation is evolving in India reveals that primary food articles have contributed significantly to inflation during FY07. At the same time, prices of manufactured products account for well above 50% of headline inflation," the policy said.