Inflation in for a crude spike

CREDIT POLICY: ISSUES & INSIGHTS

RBI sees every dollar hike in oil prices adding 15 basis points to the WPI.

Crude oil prices, which remained at elevated levels, pose a serious upside risk to inflation together with the persistence of nervous sentiment in world oil markets, stated the Macroeconomics and Monetary Developments 2004-05 report released by the Reserve Bank of India (RBI) on the eve of the annual credit policy.

The RBI is of the view that the every US dollar increase in crude oil prices could potentially add 15 basis points to the wholesale price index (WPI) inflation as a direct effect and another 15 basis points as an indirect effect in the absence of countervailing policy intervention.

On the various inflation indices, the RBI for the first time has proposed that the analytical value of the information of various indices can be enhanced by combining them into a harmonised index of consumer prices, which assesses consumer price inflation on an economy-wide scale.

According to the IMF, a permanent increase of $5 per barrel is estimated to reduce world output by 0.3 per cent a year after the hike the report says. consequently, inflation is estimated to increase by 60-70 basis points in major developing regions which will be more than three times the increase in industrial economies.

Meanwhile, the RBI report is of the view that a notable feature of the central government finances during the 3004-05 was the persistence of surplus cash balances held by the government with the RBI.

As part of the fiscal discipline, several state governments have already enacted fiscal responsibility legislation , a number of state governments have taken initiatives towards empowering the local bodies based on the recommendation of the respective state finance commissions.

On the financial markets, the market capitalisation of the Bombay Stock Exchange reached an all-time high of Rs 17,95,267 crore on March 2005 which was higher by 43.8 over March 2004.

The strength of the India's external sector came to the fore even in the tumultuous external environment. While the report highlighted the IMF projection of the world output growth at 4.3 per cent for 2005 down from 5.1 per cent in 2004.

Potential risks for growth include growth imbalances and, consequent, disorderly exchange rate movements, reversal of global capital flows from emerging and developing economies.