RBI to raise inflation outlook in annual report

The Reserve Bank of India (RBI) is understood to be raising its outlook on the inflation rate upwards to a range of 6-6.5 per cent for the current financial year.

The revised estimate will be released in forthcoming annual report of the central bank. In the May monetary and credit policy, the RBI pegged its inflation rate estimate at 5 per cent.

According to sources, there is a view emerging in the RBI that oil prices shock might linger for quite sometime and even set a new base for price expectations. Based on this reasoning, the year-end inflation rate based on the wholesale price index forecast is being revised upwards.

There has been a series of meetings between the finance ministry and the RBI brass over the rising inflation rate. RBI governor Y V Reddy had recently said: "The RBI is monitoring the developments carefully. In particular, it is analysing how the imported oil shock is turning out to be globally and how it is being absorbed domestically."

Reddy had also indicated that at the time of the announcement of the May monetary policy, the swing in prices was anticipated but "the inflation in July has not turned out ot be higher than what we expected".

This comment was made when the inflation rate for the week ended July 24 surged to 7.51 per cent. Subsequently, the inflation rate went up to 7.96 per cent as August 8.

The RBI is of the view that the rising inflation rate is basically a fallout of the supply side problem in the form of rising oil prices and commodity prices. The consumer price index (CPI) based inflation has however remained at 3.5 per cent.

The RBI annual report will also document the central bank's analysis of a below normal monsoon and tell-tale signs of credit offtake. The central bank has been selling dollars in the market to support the spot rupee and at the same time sucking out excess liquidity from the market.

Sources said the report may indicate a shift in the RBI's stance on interest rates even though it is not in a hurry to raise the rates.

"It will prepare the Indian Inc for a possible rate hike in case the inflation rate continues to remain high for months," said a source.