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High consumer price-based inflation worries RBI

April 21, 2009 09:39 IST
The Reserve Bank of India (RBI), in its quarterly monetary and macroeconomic review, has expressed concerns on the existing high levels of inflation rate when based on the consumer price index (CPI).

The central bank's report points out that, unlike the inflation based on the wholesale price index (WPI), CPI-based inflation in India, however, remains high with recent evidence of very modest moderation, "...and the transmission process of lower inflation at the wholesale level to inflation at the retail level has emerged as an important issue in the conduct of Reserve Bank's monetary policy."

Consumer price inflation remained in the range of 9.6-10.8 per cent during the January-February 2009 period as compared with 7.3-8.8 per cent in June 2008 and 5.2-6.4 per cent in February 2008.

Whereas WPI inflation stood at 0.2-0.3 per cent in March 2009 as compared with 12.9 per cent on August 2, 2008.

"The higher level of consumer price inflation, as compared with WPI inflation in recent months could be attributed to higher prices of food articles, which have higher weight in CPI," the report said.

Inflation to remain low, but oil prices uncertain

However, the central bank indicated that, in the wake of an expected improvement in agricultural production as well as low international commodity prices, inflationary pressures are expected to remain at a low level through the greater part of the 2009-10.

According to the report, global crude oil prices are expected to remain stable during the current financial year, at the current level of $50 per barrel.

"If global economic recovery begins earlier and is stronger, there is an upside risk of even higher oil prices from the current level. Assuming that there are no major crude oil supply disruptions, average WTI (West Texas Intermediate) prices are expected to be $52.6 per barrel in 2009, which is 47 per cent lower than the average price for the year 2008 ($99.6 per barrel). In view of the relatively tight demand supply-balance over the long run, the long-term outlook for oil, however, remains highly uncertain," the apex bank said.

Price-rise down due to base effect

Driven by the reduction in the administered prices of petroleum products and electricity, as well as the decline in prices of freely priced minerals, oil items, iron & steel, oilseeds, edible oils, oil cakes and raw cotton, year-on-year (y-o-y) headline inflation in the country showed a sharp correction from a historic peak of 12.90 per cent on August 2, 2008 to 0.3 per cent as on March 28, 2009.

"A significant part of the end year reduction in WPI inflation could also be attributed to the base effect reflecting the rapid increase in inflation recorded during the last quarter of 2007-08," the report said.

With the decline in prices of sugar, edible oils/oil cakes, textiles, chemicals, iron & steel and machinery & machine tools, manufactured products' inflation fell to 1.4 per cent on March 28, 2009 compared with 7.3 per cent a year ago.

BS Reporter in Mumbai
Source: