RBI warns of more price pains ahead- Business News
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RBI warns of more price pains ahead

In its review of the economy released on Monday, the RBI warned that India is likely to "import" inflation as global commodity prices surge, adding to the food prices-led domestic price spiral.

  • Mumbai,  January 25, 2011  
  • |  
  • UPDATED   11:37 IST

Brace yourself for a bigger bite on your wallet. India's monetary authority the Reserve Bank of India (RBI) has warned that inflation is likely to get worse before it gets better.

In its review of the economy released on Monday, the RBI warned that India is likely to "import" inflation as global commodity prices surge, adding to the food prices-led domestic price spiral.

In the pre-policy macro-economic review, RBI said, "Even if inflation softens in the near-term, sustaining a low inflation regime would require addressing structural rigidities from the supply side in specific sectors." Third quarter review of monetary policy is scheduled for Tuesday.

"Since persistent high inflation could endanger the growth objective and also amplify risks to inclusive growth, containing inflation will have to be the predominant objective of monetary policy in the near-term," RBI added.

Even after hiking the policy rates - repo (at which it lends to banks) and reverse repo (at which it pays on bank deposits with it) rates - by 1.5 per cent and two per cent respectively since March 2010, inflation did not moderate to the extent expected.

The expected significant softening of food inflation after a normal monsoon did not materialise, reflecting the impact of growing structural imbalances in certain sectors, particularly non-cereal food items.

Food price inflation is still hovering above 15 per cent with onion even as vegetable prices shot up multi-fold in the recent weeks, while monthly Wholesale Price Index (WPI) inflation has spiked to 8.43 per cent in December from 7.48 per cent in November 2010.

"Since a lower inflation regime is essential for sustainable high growth, containing inflation becomes the dominant policy objective in the current environment," RBI said.

Taming the spiralling inflation while ensuring that the growth impulse remains intact, is the major challenge for the RBI. Higher inflation as well as higher interest rates, both have the potential to derail the high growth path the economy is just embarking upon.

Even if inflation softens in the near-term, sustaining a low inflation regime would require addressing structural issues at the macro level. "Closer monitoring of production, consumption and price patterns in specific commodities with a focus on supply- chain management to contain market pressures would be helpful," said the apex bank.

The supply augmentation measures in the short- run include timely imports, wherever feasible.

The expected moderation in domestic inflation would be upset by global commodity inflation, which is expected to pick up pace soon. "As a result, some price pressures could persist, even as inflation softens," it said.

RBI also highlighted rising trade deficit and falling invisibles (inflows from Indians working abroad), and sharp jump up in portfolio inflows and significant decline in net foreign direct investment (FDI) inflows as other areas of concern.

Courtesy: Mail Today