New Delhi, March 26: The Reserve Bank of India (RBI) said on Thursday it was imperative to curb inflationary pressures fuelled by increased capacity utilisation and rising energy and commodity prices.
Earlier on Thursday, a document from the country’s top policy panel said India should aim for an average 5 percent inflation and this was a target “quite within the realm of possibilities”.
A week after the RBI unexpectedly lifted its key rates, it said food prices were moderating but were still high and the pace of inflation in non-food manufactured goods was accelerating.
“Taken together, these factors heighten the risks of supply-side pressures translating into a generalised inflationary process,” the RBI said in its first-ever report on financial sector stability.
Unlike some central banks, the RBI does not follow a policy of targeting inflation, but analysts say it sees inflation of around 5 percent as being in its comfort zone.
RBI Governor Duvvuri Subbarao had said the country cannot target inflation as the transmission of monetary policy is muted.
The report’s tone, described as hawkish by dealers, reinforced a shift in the central bank’s main focus to contain wholesale price inflation (WPI) that is close to 10 percent.
The 10-year benchmark bond yield rose 2 basis points to close at the day’s high of 7.88 percent after the RBI’s report. It had ended the previsou session at 7.85 percent.
India’s headline inflation averaged an annual 5.5 percent in the period between 2007/08 and 2009/10. Between 2002/03 and 2006/07, it averaged 5 percent.
The RBI had earlier said demand-side pressures were building up and analysts expect a further rate increase at its policy review on April 20.
India has blamed the recent inflationary spell on poor farm output caused by the worst drought in decades last year, followed by floods in some parts of the country.
The Planning Commission document, obtained by Reuters, said price stability was crucial for economic growth to benefit the broader population and the government’s policy should try to remove “serious constraints in production and distribution” that were causing price pressures.
“In order to achieve price stability, we need to target a headline rate of inflation for both CPI (consumer price inflation) and WPI indices of 5 percent and then progressively lower,” the document said.
BORROWING CHALLENGES
The RBI spoke of challenges in managing the central government’s record $100.4 billion borrowing plan for the financial year that begins on April 1 and said the timing and maturity profile of fresh issuances were key.
Analysts have said the RBI could resort to more short-term and floating-rate bonds in a bid to balance borrowing.
The huge borrowing sums could harden yields, making funds for banks and corporates more expensive, the RBI said.
“In this context the downsizing of the government borrowing programme becomes critical, so as to help sustain a moderate interest rate regime,” the RBI said.
India borrowed heavily to bridge its 16-year high fiscal deficit of 6.9 percent of GDP in 2009/10, as it rolled out stimulus measures to shore up the economy.
But with the economy expected to grow 7.2 percent in the current fiscal year and 8.5 percent in the next, the government has begun jettisoning these measures.
It has also committed to cut its fiscal deficit to 5.5 percent in 2010/11 and further to 4.1 percent by 2012/13.
The RBI said the process of fiscal consolidation would help better monetary management.
—–Agencies