Apprehending that high oil prices could continue, the Reserve Bank of India on Monday said it has started 'intensive examination' of the issues and options for managing demand and easing inflationary pressures.
RBI Governor Y V Reddy said that after evaluating the emerging inflation scenario he had met the prime minister and the finance minister on Saturday for a detailed discussion, and the RBI 'will play its part in moderating and managing aggregate demand so that pressures on prices are not intensified.'
Emphasising that RBI had been taking 'pre-emptive' measures to curb inflation, Reddy said besides hiking cash reserve ratio twice by 25 and 50 basis points, respectively, the apex bank also increased the rates for short-term lending to banks by 0.25 per cent after the government increased the domestic fuel prices on June 5.
"We will now have further internal assessment to consider our stance and measures in the light of the discussions I had with the government on Saturday," he said, adding that further consultations would be held quickly with all concerned including the Technical Advisory Committee on the Monetary Policy.
While the RBI now reviews the monetary policy every quarter, the next review being at the end of July, the Bank has been taking measures mid course to check inflation that shot to a 13-year high of 11.05 per cent, putting immense pressure on the government to hold the price line.
In a clear indication of an imminent and immediate intervention by the apex bank, Finance Secretary D Subbarao <a href=//m.rediff.com/money/2008/jun/21infla3.htm target=_blank><B>said on Saturday</A></B> that that the monetary measures by RBI would be the first line of defence though the government has its fiscal options open.
Reddy said the price pressure on account of oil was not entirely unanticipated, but it had been magnified in the WPI (inflation) figure last week and the fuel price hike (June 5) had come on top of underlying inflationary pressures."
"At the current level of global prices, the pass through of oil prices have not been happening on a continuous basis," he said, adding that inflation stemming from oil price hike was a problem for all countries and India's solutions to the problem would also be similar but "tailored to suit our conditions."
Notwithstanding the "oil shock" that sent inflation galloping, he said India was "safe" in regard to financial sector and outlook is "optimistic" on food front.
Apprehending that high level of energy prices may not be temporary, Reddy said that as of now the fuel prices were a difficult problem, but the economy was better off to adjusting to possible new reality of high and volatile fuel prices.
"We have to manage the shock and smoothly adjust to near realities taking advantage of our strength in real sector also. RBI's effort is to smoothen and enable this adjustment to new reality so that inflation expectations are contained."
"We are confident that with a well managed smooth adjustment of this episode, inflation will be brought in alignment with our policy aim," he added.
RBI had earlier this year said that its monetary policy target would be to contain inflation at around 5.5 per cent this fiscal.
Reddy said RBI will continue to take "determined and calibrated" measures as and when warranted with a focus on managing expectations and on enabling adjustments in the economy in response to the oil shock."
He appealed to all the financial market participants to appreciate the inflation scenario against the backdrop of oil price hike and participate in managing demand and maintain orderly conditions, drawing from their strength on their respective balance sheets.
He said the central bank has successfully moderated signs of overheating that emerged a couple of years ago. "We had acted continuously and in our timely fashion, to withdraw monetary accommodation since about four years ago."
The RBI Governor said the apex bank had ensured orderly conditions in money, government securities and foreign exchange market on a continuous basis through its operations.
To a question, he said managing inflation will not necessarily retard growth. "On the basis of current information, we do not come to a conclusion that managing this (inflation) problem will necessarily involve sacrificing growth," Reddy said.
Indian economy grew by 9 per cent during 2007-08 against 9.6 per cent in the previous fiscal. RBI in its annual credit policy has projected GDP growth rate to be 8-8.5 per cent for this fiscal.