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RBI warns against persisting inflationary pressures

Reserve Bank is contemplating further monetary policy tightening measures,

Written by ENS Economic Bureau | Mumbai |
December 23, 2010 2:28:16 am

With prices of crude oil and food items like onions on the rise,India’s monetary managers are getting worried. Indicating that the Reserve Bank is contemplating further monetary policy tightening measures,deputy governor Subir Gokarn today said headline inflation is not easing as fast as the apex bank would like and upside risks still remain high.

“Inflation is not easing as we would like it to be. Upside risks to inflation are still high,” Gokarn told reporters on the sidelines of a seminar on debt markets organised by credit ratings agency CARE here today. Economists have already warned of a hike in key policy rates by the RBI in the January policy review.

He said the skyrocketing prices of onions will only have a temporary impact on inflation. “I don’t think high onion prices will have a long-term impact on inflationary pressures,as the government has said that it has been doing everything to manage supply side issues,” Gokarn said. “Also,high food price inflation was driven more by a persistent rise in nutritional food items like cereals,” he added.

Gokarn further indicated that rising commodity prices in global markets also point toward the increasing risk of headline inflation. The Reserve Bank had left key short-term interest rates unchanged at its mid-quarter review last Thursday,but warned that inflation was still well above its comfort level. It also unveiled steps to address the tight liquidity situation by slashing the statutory liquidity ratio — which is the portion of funds that banks are required to park in government bonds,gold and other illiquid assets — by 100 basis points to 24 per cent,as well as plans to purchase government securities through open market operations,which would infuse Rs 48,000 crore into the system.

Due to persistently high inflation,the RBI had indicated at its policy review meet in November that the rate of price rise will only moderate to 6.5 per cent by March-end,a full percentage point more than its earlier projection. In line with expectations,headline inflation eased to 7.48 per cent in November — its lowest level in a year — and the finance ministry expects to see a further decline in inflation numbers. However,food inflation,which has been on the rise for past three weeks,is likely to go up in the weeks ahead on account of sky-high prices of onions and other certain other vegetables.

Food inflation rose to 9.46 per cent for the week ended December 4,due to an increase in vegetable prices. It stood at 8.69 per cent in the previous week. Against this,in the corresponding week last year,food inflation was ruling at 20.90 per cent. Rising crude and commodity prices in international markets are also likely to have a cascading impact on inflation back home. OMCs had increased the retail price of petrol by Rs 2.95 a litre last week and an EGoM is likely take a decision on hiking prices of petroleum products soon. With Agencies

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