RBI for hiking prices of petroleum products

Making a case for increasing prices of petroleum products and deregulating diesel prices, the Reserve Bank on Monday said these steps are necessary to contain fiscal slippages and arrest decline in growth.

"The policy design to achieve macro-objectives hinges on deregulation and the upward adjustment of oil prices by letting the demand effects work towards diminishing fiscal and external risks," the RBI said in its Macroeconomic and Monetary Developments in 2011-12.

While petrol prices are market-linked, the government decides the rates of LPG, kerosene and diesel, which usually results in a large budgetary expenditure on subsidies.

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"This would provide space for fiscal and monetary policy to act in tandem to achieve the growth and inflation objectives in 2012-13 that otherwise appear to be at cross purposes," it said.

The RBI said that the imports bill will remain high unless prices of petroleum products are raised for a complete pass-through and demand for precious metals is curbed.

"This would provide space for fiscal and monetary policy to act in tandem to achieve the growth and inflation objectives in 2012-13 that otherwise appear to be at cross purposes," it said.

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Crude oil prices have been rising due to geo-political reasons, including the Iran situation. The prices had touched a high of $125 a barrel last month.

High subsidies are putting pressure on the country's fiscal deficit, which has touched 5.9 per cent of GDP last fiscal and 5.1 per cent in 2012-13.

The government targets to bring down the subsidy bill to below 2 per cent of GDP this fiscal and 1.75 per cent in the subsequent years. The government has made a provision of Rs 40,000 crore (Rs 400 billion) towards fuel subsidy.

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On the current account deficit, RBI said that the government should take steps to retain it at the current levels.

"Steps need to be taken to facilitate a complete pass-through of international commodity prices, especially by raising domestic prices of petroleum products, curb the demand for precious metals and accelerate reforms to attract FDI," it said.

It said the robust demand in gold and continuing high crude oil prices could adversely affect India's trade balance.