Imported price shock, main cause of rise

July inflation way above expectations: Reddy

The Reserve Bank of India (RBI) today admitted that the current rise in the inflation rate was way above its expectations.

RBI governor Yaga Venugopal Reddy said that at the time of the announcement of the monetary policy in May 2004, the upswing in prices during this period was anticipated but "the inflation in July has now turned out to be higher than what we expected". In its May credit policy, the RBI had projected the annual inflation rate at 5 per cent.

Reddy singled out "imported price shock" as the main driven for the spike in the headline inflation. "We will respond to developments on an ongoing basis with a view to maintaining price stability over the year," Reddy said.

The RBI governor was speaking to reporters on the sidelines of the first convocation of the post-graduate programme in banking and finance (2003-04) at the National Institute of Bank Management.

The inflation rate for the week ended July 24 surged to 7.51 per cent in the year to July 24, up from 6.52 per cent a week ago.

"We are monitoring the developments carefully but at the moment it is clear that there is a significant component of import price shock in the spike in the headline inflation. What is needed is a careful analysis of evolving circumstances "" in particular. How the 'shock' would turn out to be globally and how it would be absorbed domestically," he said.

Apart from the global factors, domestic factors such as liquidity overhang and monsoon conditions have played a crucial part in the rise in inflation, Reddy pointed out.

Some increase was not unanticipated but the increase in the price of commodities specially relevant to our economy has been significant, he added.