The Reserve Bank of India (RBI) today indicated that inflation management remained the dominant theme of its monetary policy moves.
“Notwithstanding some moderation in recent months, headline inflation remains significantly above its medium-term trend. What is of concern is that while inflation in non-food manufactured products has stabilised, food inflation has not shown the expected post-monsoon moderation. Persistently rising food prices even in the wake of a normal monsoon raise concerns about the structural nature of food inflation and its consequent impact on inflationary expectations,” the central bank said in the second quarter review of monetary policy.
“Further, when the economy is growing close to trend, the risks of structural food inflation spilling over onto prices of other commodities are significant and that could potentially offset the recent moderation,” it said.
RBI has projected inflation based on the wholesale price index (WPI) at 5.5 per cent for March 2011, which is equivalent to six per cent under the old series, the earlier projection. Though inflation based on WPI has come down in recent months, it was at 8.6 per cent in September, above the central bank’s comfort level.
| WHAT TO WATCH OUT FOR |
| * Food price inflation |
| * Global commodity prices |
| * Demand pressures arising from sustained growth amidst capacity onstraints |
Going forward, RBI said, food inflation would have a significant bearing on the overall number. Besides, it warned the increase in global commodity prices had become a cause for concern. Also, demand pressures from sustained growth amid tightening capacity constraints will have an impact. “On balance, inflation is expected to moderate from the present elevated level, reflecting in parts some easing of supply constraints and concerted policy action,” RBI said.
Among the three areas the central bank is looking to deal with through the monetary policy, inflation is at the top. “Contain(ing) inflation and anchor inflationary expectations, while being prepared to respond to any further build-up of inflationary pressures,” was the top item on the central bank’s agenda.
RBI said during the first decade of the millennium, the average headline inflation rate had remained in the range of 5-5.5 per cent, compared to the historical trend rate of about 7.5 per cent. It said the conduct of monetary policy would continue to condition and contain perception of inflation in the range of 4-4.5 per cent, while the medium-term objective was to lower it to 3 per cent.
While pointing that the new WPI series was a better representative of commodity price levels with an updated base, RBI said it would evaluate an array of aggregate and disaggregated measures of inflation in the context of the evolving macroeconomic situation.
At the same time, it said the various consumer price index (CPI) baskets still reflected the consumption pattern of the mid-1980s and 2001 that gave a relatively higher weight to cereals. “To that extent, CPI baskets understate the underlying food inflation,” it said.
