The Reserve Bank of India on Monday said the steps initiated by the government in recent weeks are expected to help control inflation and inflationary expectations.
Listing out the possible pressure points, including high oil prices that are expected to stay at elevated levels, the RBI report on Macroeconomic and Monetary Developments in 2007-08 noted that inflation risks due to petroleum prices remained incipient as the government has decided to extend the subsidy scheme for kerosene oil sold through the public distribution system and cooking gas up to 2010 from March 2007 earlier.
Besides, it pointed to the October 2007 decision of the government to bear 42.7 per cent of the under-recoveries of oil marketing companies on retail sales.
In addition, the recent announcement to hike the cash reserve ratio, the proportion of deposits that banks keep with RBI, from 7.5 per cent to 8 per cent is expected to contain inflationary expectations.
After falling to 3.1 per cent level in October 2007, inflation has once again emerged as a major worry for the government and RBI in recent weeks. Inflation based on the Wholesale Price index was estimated at 7.4 per cent at the end of March. The fall from 6.4 per cent at the start of the year was attributed to the lagged and cumulative monetary policy actions as also fiscal, administrative and supply side measures initiated
by the government.
The report released on the eve of the Annual Policy Statement for the current financial year said 12 items and product groups - rice, wheat, milk, raw cotton, oilseeds, iron ore, coal, mineral oil, edible oil, oil cakes, basic heavy inorganic chemicals and metals - accounted for 82 per cent of the headline inflation. "The increase in domestic prices of some of these commodities reflected the international commodity price pressures.
For instance, global inflation for rice was estimated at 76.3 per cent between March 2007 and March 2008, while in India, the variation during 2007-08 was estimated at 5.7 per cent. In case of wheat, the global inflation was 120.8 per cent, while in India it was 7.3 per cent.
The RBI report also pointed out that the headline inflation firmed up in major economies during the second half of 2007-08, reflecting the combined impact of higher food and fuel prices as well as strong demand conditions, especially in emerging markets.
"The monetary policy responses during the year, however, were mixed in view of heightened concerns about the implications of credit crunch arising out of the US sub-prime crisis on financial stability and economic growth in the latter part of the year," the report said.
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