<b>Credit Policy Review</b>: Inflation top priority

Reserve Bank of India (RBI) today said it would accord highest priority to contain inflation within 5-5.5% while keeping its projection for economic growth during 2006-07 unchanged at 7.5-8%.

It would also endeavour to ensure that appropriate liquidity is maintained to meet the legitimate credit requirements consistent with price and financial stability, the bank said in the quarterly review of the annual statement on monetary policy.

Taking note of the surge in global oil prices, which resulted in India's crude basket rising from $60.1 a barrel in January-March to $71.4 per barrel in July 2006, RBI Governor Y V Reddy said: "Fuel prices, which account for 35% of the increase in Wholesale Price Index constitute a major risk to headline inflation."

Stating that domestic prices of petrol and diesel were increased by nearly 9% and 6.5%, respectively, in early June, he said: "International crude oil prices continue to be volatile and rising..."

The trend so far during 2006-07 were indicative of the sharp increase in food prices, which constituted a relatively larger share in the consumer price basket, he said.

Reddy said while domestic development continued to dominate the economy, global factors tend to gain more attention now than before. Case in point: Globally, a large number of central banks, including US Federal Reserve, European Central Bank and Bank of Japan, have raised their official interest rates from the unusually low levels -- which is widely believed to have influenced RBI's decision to raise short term interest rates.

The bank would take steps that would foster growth momentum witnessed in the first quarter besides ensuring price stability with a view to containing inflationary expectations.

The central bank said it would use all policy instruments including repo, reverse repo rates and CRR as and when the situation demands to ensure appropriate credit to productive sectors.