The Reserve Bank of India said on Wednesday the objective of policy measures taken at the current juncture would be to bring inflation as close as possible to the stated range of 5 to 5.5% at the earliest, while continuing to pursue the medium-term goal of a ceiling on inflation at 5%.
The central bank, in its third quarter review of the policy on Wednesday, said: "In recognition of the rising inflationary pressures, the government of India has moved in a determined fashion in recent weeks to contain inflation expectations.
"With a view to reducing manufacturing costs, customs duty on specified capital goods and parts thereof, project goods and extensions has been reduced from 12.5/10% to 7.5%. The duty on inorganic chemicals, base metals of primary and semi-finished form, ferro-alloys, stainless steel and other alloy steel has been reduced to 5%. Portland cement has been exempted from customs duty.
"To contain pressures from prices of essential commodities, the customs duty on edible oils has been reduced, in addition to exempting maize, wheat and pulses.
Furthermore, a ban has been imposed on forward trading of tur and urad to minimise price volatility. While the recent actions taken by the government are welcome and support the continuum of monetary measures undertaken since October 2004, it is important to iterate that effective containment of inflationary pressures is best served by a combination of fiscal, external and supply management policies, supplemented and complemented by ongoing implementation of monetary measures.
"Inflation, to the extent it is a monetary phenomenon, demands timely and credible monetary policy actions, recognising the lagged effects of such policies. Thus, the current package of measures should be viewed not only as complementing the lagged effects of the actions already taken but also as meeting the emerging pressures on price stability, and more importantly, inflationary expectations.
The monetary measures are meant to complement the fiscal and supply-side measures already undertaken in the recent period. This is in consonance with the Annual Policy Statement for 2006-07 as well as the Mid-Term Review which state that the policy endeavour is to contain year-on-year inflation for 2006-07 in the range of 5-5.5%.
The objective of the policy measures being undertaken at the current juncture would be to bring the inflation as close as possible to the stated range of 5-5.5% at the earliest, while continuing to pursue the medium-term goal of a ceiling on inflation at 5%.
"Over the remaining part of the year, management of liquidity would receive priority in the policy hierarchy. Consequent to the tightening of market liquidity, the impact of monetary policy is expected to be stronger than before.
"The Reserve Bank would use all policy instruments, including the CRR, to ensure the appropriate modulation of liquidity in responding to the evolving situation."
The Monetary and Credit Policy 2006-2007