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Inflation monster down, not out

Inflation may have cooled, to less than 5 per cent for the week ended May 26, down from over 6 per cent a few weeks ago, but the authorities are not taking it easy yet. As part of its strategy to combat rising prices, the government is now planning to permit cheaper imports.

By Rishi Joshi | Print Edition: July 1, 2007

Inflation may have cooled, to less than 5 per cent for the week ended May 26, down from over 6 per cent a few weeks ago, but the authorities are not taking it easy yet. As part of its strategy to combat rising prices, the government is now planning to permit cheaper imports of edible oils like palm, soya, rapeseed and mustard. As part of the gameplan, STC, MMTC and NAFED may be asked to import one million tonne of these oils from Indonesia, Malaysia, Argentina and Brazil for sale in the Indian market; the companies will be compensated for their losses.

Meanwhile, RBI Governor Y.V. Reddy has publicly voiced his fears about inflation rearing its head again. Reddy feels that the mismatch between supply and demand of food items could push prices up significantly.

Y. V Reddy
Y. V Reddy
 

In his address at the conference on "Monetary Policy under Uncertainty" in Argentina, recently, he pointed out that in growing economies like China and India, mounting demand for food puts huge pressure on prices of food articles.

Economists agree. They feel that while the WPI inflation levels have now come down to acceptable levels, there is still pressure on food prices. Says Siddhartha Roy, Economic Adviser, Tata Group: "Manufacturing inflation is under control, but food prices are still high. There has also not been a significant decline in oilseeds prices." Adds Subir Gokarn, Chief Economist, CRISIL: "The recent wheat harvest has been good; this has moderated the pressure on prices. Going forward, the monsoons will play a crucial role in determining the quality of harvest, particularly of the pulses crop, which will directly affect inflation."

But crucially, RBI has been hiking interest rates to combat inflation. This is affecting corporation expansion plans, personal consumption and the loan-fuelled economic boom.

Now that Reddy has gone on record saying he hopes to contain inflation in the 4-4.5 per cent range in the medium term, what will its impact be on interest rates? Says Roy: "There is no reason for interest rates to harden further. If the current inflation trend continues, rates should soften." But RBI's tightrope walk between inflation and investment will continue for some more time.

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