MUmbai: Hinting at tough measures over time to tackle double-digit inflation, which has touched 11.89%, the Reserve Bank of India (RBI) has said potential inflationary pressures from international food and energy prices appear to have amplified. By current indications, it said, they are likely to remain for some time.
The implication of a hike in key interest rates was made by finance secretary D Subbarao in an interview to a news agency. He said inflation may not have peaked yet and that the central bank may have to hike rates further. “That looks like an obvious solution,” the secretary told Bloomberg News from Tokyo on Monday.
“I can’t say firmly that it (inflation) has peaked because inflation will depend on a number of factors, including global factors, which are beyond our control,” Subbarao added. He also said that India’s exchange rate is not at this stage an effective tool to contain inflation.
RBI will unveil its first quarter review of Annual Monetary Policy on Tuesday, with analysts expecting some hike in the key rates. The First Quarter Review of Macroeconomic & Monetary Developments in 2008-09, released by the central bank on Monday, said it would attempt to keep inflation at 4.0-4.5%, moving to a medium-term objective of 3%.
RBI said the Indian inflationary situation reflects the impact of some pass-through of higher international crude oil prices to domestic prices, as well as continued increases in the price of iron and steel, basic heavy inorganic chemicals, machinery and machine tools, oilseeds/edible oils/oil cakes and raw cotton on account of strong demand, international commodity price pressures and lower FY08 rabi production of oilseeds. The seasonal hardening of vegetables prices as well as increase in prices of textiles has also contributed to inflation in 2008-09.
Painting a bleak picture on the industrial front, the RBI’s industrial outlook survey of manufacturing companies in the private sector for April-June 2008, said business expectation indices based on the assessment for April-June 2008 and on expectations for July-September 2008 declined by 5.4% and 0.9%, respectively, over the corresponding previous quarters. The indices, however, increased by 0.3% and 0.8%, respectively, over the corresponding quarters of the previous year.
Most corporates expect an increase in raw material prices and the increased production cost is expected to be adjusted by keeping inventory levels (both raw material and finished goods) at ‘below average’ and by increasing selling prices. The results of RBI’s professional forecasters survey in June 2008 suggested a moderation in economic activity for the remainder of the fiscal.
