The Reserve Bank of India (RBI) today warned about the invisible and ‘suppressed’ inflationary pressure in the economy, owing to large under-recoveries of the oil marketing companies (OMCs).
The RBI said the under-recoveries being borne by the exchequer, even after the rise in administered fuel prices in June, were still very high at Rs 1,00,000 crore. And reducing the amount will still lead to price rise, both directly or indirectly.
“If the government raises administered prices, the inflation implications are straightforward. If the government absorbs this in the fiscal accounts, the resultant expansionary impact will add to inflation pressures,” RBI said. The central bank on Tuesday revised its March-end inflation projection to seven per cent from six per cent projected in May.
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The RBI was of the view that rising fuel costs should be passed on to consumers to contain demand. “If crude prices do not moderate in the near term, it will be desirable to pass on the increase, both from the perspective of energy conservation and containing demand,” said RBI, adding, that monetary tightening will depend on the inflation trajectory and it will continue with its monetary stance till the time a sustainable downward trend in prices is not seen.
The wholesale price index-based inflation was 9.4 per cent for June, well above RBI’s comfort level of 4.5 per cent. Rise in inflation is attributed to the increase in administered fuel prices, minimum support price and strong demand-side pressures.
“RBI has adopted a shock therapy to manage inflation. The stance is clearly hawkish and indicates that more rate hikes are in the pipeline if inflation does not ease,” said Neeraj Swaroop, regional chief executive, India and South Asia, Standard Chartered Bank.
Economists are also of the view that it was important to raise interest rates to contain inflation, which is unlikely to come down before the later part of the year.
Leif Eskesen, chief economist (India and Asean), HSBC said: “It is a decisive move, since inflation is still a key concern. We still think monetary policy is in a neutral gear and policy rates have to go further up to slow growth below its potential. Going ahead, we see at least another 25-basis points hike. With a strong move like this, there is a chance that RBI has bought themselves some time and there may be a pause (in rate rise) in the next policy meeting. But there is also an equal chance that inflation may not come down and growth is not impacted till the next meeting.”
According to RBI, the inflation outlook is shaped by factors like overall performance of the south-west monsoon and crude oil prices, among others. “The price of oil could remain volatile as a consequence of the pace of global recovery, liquidity conditions and the overall oil supply situation,” RBI said.
