On the eve of the first quarter policy review, the Reserve Bank of India (RBI) today cautioned against the rising threat from general inflation, but sounded optimistic about food prices moderating in the coming months on better Kharif crops following an almost normal monsoon.
The RBI, which is widely expected to hike its repo and reverse repo (overnight lending and borrowing rates) rates by 0.25 per cent tomorrow to check inflation, said the recent fuel price hikes and lagged reporting of past price increases have added to inflationary pressures.
"Overall, the inflationary process, which originated from supply shocks, has now become generalised," the apex bank said, adding, "the contribution of the fuel group and the non-food manufacturing group increased...Suggesting increasing generalisation of the inflationary pressures."
On a positive note, the RBI said a better kharif output is expected to help bring down food prices, which are still at elevated levels. "Given the expected better Kharif output than last year, food price pressures may moderate during the course of the year," the central bank said.
Inflation, as measured by the wholesale price index, has been hovering above 10 per cent since February and stayed at 10.55 per cent in June, which, analysts say, will prompt the central bank to further tighten its policy stance. So far in 2010, the RBI has hiked its key-rates thrice to tame high price pressure on the common man and the economy.
The central bank said the full impact of the revision in administered prices of petroleum products effected late June will be reflected largely in the WPI inflation for July directly and indirectly. The government, on June 25, decontrolled petrol prices and raised diesel prices by Rs 2 a litre in preparation for an eventual decontrol.
"The direct impact of these measures are expected to cause about 0.9 per cent increase in WPI inflation, with the indirect impact on prices through input cost escalation with a lag likely to raise the full impact to about 2 percentage points, assuming partial pass-through," the central bank said.
Further, the RBI observed that contribution of food inflation to overall inflation declined from above 100 per cent last December to about 28 per cent in June, indicating its generalised nature. "The contributions of the fuel group and the non-food manufacturing group rose with more or less equal weighted contribution of each, suggesting increasing generalisation of the inflationary pressures," the RBI said.
