MUMBAI (Commodity Online): Global commodity prices especially crude oil, rise in food inflation stemming from monsoon performance and uncertainty about capital inflows to the country will have an impact on inflationary presssures in India in 2011-12, according to D Subbarao, Governor of Reserve Bank of India.
Announcing the increase in repo rate by 505 basis points to 8 percent while presenting the first quarter review of monetary policy for 2011-12, D Subbarao said that inflation continues to be the dominant macroeconomic concern. The headline Whole Sale Price Index (WPI) inflation rate for the first quarter of this fiscal year remained stubbornly close to double digits and inflationary pressures continued to be broad-based. Both the level and the persistence of WPI inflation are a cause for concern. Non-food manufactured product inflation ruled above 7 per cent in the first quarter suggesting that producers, operating at high levels of capacity utilisation, are able to pass on rising commodity input prices and wage costs to consumers.
Inflationary pressures are clearly very strong, notwithstanding signs of moderation of economic activity. Importantly, the softening of commodity prices over the past three months did not translate into a decline in either headline WPI inflation or non-food manufactured products inflation. If the softening reverses, commodity prices are likely to exert inflationary pressures for some time, making moderation in demand necessary to bring inflation down.
The indicative risks for inflation projections for 2011-12 as outlined by RBI Governor are:
First, uncertainty about the future path of global commodity prices, especially oil; second, uncertainty about capital flows from the perspective of financing the current account deficit; third, risks to food inflation stemming from the monsoon performance, higher minimum support prices and inadequate supply response pertaining to protein-rich items; and, fourth, significant upside risks to the projected fiscal deficit for 2011-12 as fiscal deficit has been a key source of demand pressures.
RBI Governor said that the Bank is strongly of the view that controlling inflation is imperative both for sustaining growth over the medium-term and for increasing the potential growth rate. This is a critical attribute of a favourable investment climate, on which the economy's potential growth depends. Fiscal consolidation can contribute to a sustainable growth path by rebalancing demand away from government consumption and towards investment. The Reserve Bank’s efforts of achieving low and stable inflation could also be supported by concerted policy actions and resource allocations to address domestic supply bottlenecks, particularly in respect of food and infrastructure.
