Apex bank gears up to tackle inflation irritant

The Reserve Bank of India has once again raised the red flag on inflation even as it sounded optimistic about the country's economic growth prospects.

Releasing a document titled "Macroeconomic and Monetary Developments in the Second Quarter of 2010-11", the central bank today said GDP growth was consolidating around the current trend level of 8.5 per cent, but headline inflation remained a source of worry. The document will serve as the backdrop for the monetary policy review here tomorrow. Two RBI surveys -one of professional financial forecasters and the other of industry players -gave a clear indication of the opportunities and the challenges that the country now faces.

Image Courtesy: telegraphindia.com

The financial forecasters upped their median GDP growth target for 2010-11 to 8.5 per cent from 8.4 per cent. However, the RBI's industrial outlook survey warned that the index of industrial production (IIP) -which has recorded a double-digit growth on the back of a robust inventory build-up in the two quarters -could start to flag in the days ahead. "Part of the IIP growth was the result of inventory build-up, which may not persist, going forward," the RBI warned even though it said manufacturers were upbeat about growth and hiring trends.

However, in an indication that it may raise key short-term rates tomorrow, the RBI said though the WPI inflation had shown some de cline in recent months, it still remained significantly high. The central bank has raised key rates five times this year to tackle inflationary pressures. Most pundits are betting on a 25-basis-point hike in the reverse repo and repo rates, which will be the sixth interest rate hike this year and make the RBI almost as aggressive as Brazil's central bank in its policy rate action. "Overall, the inflationary process, which originated from supply shocks, and then turned increasingly generalized, seems to have moderated but remains elevated at beyond the comfort level," the apex bank observed.

According to the RBI, there are both domestic and global factors responsible for higher prices. Detailing the inflation picture, the report said the key commodities, which contributed significantly to headline inflation, were mineral oils, food articles such as milk, egg, fish and meat, minerals and textiles.

"At present, an important concern from the point of view of inflation management is the downward rigidity in primary food article prices even after a good monsoon. With a normal monsoon, it was expected that food prices would moderate substantially. However, food inflation continues to remain in double digits.
 

It needs to be emphasized that with the increase in income levels, the consumption basket is getting diversified more in favor of non-cereal items such as milk, vegetables, fruits, meat, poultry and fish, which are important from the nutritional angle," it pointed out. 

Source: http://www.telegraphindia.com/

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