FinMin wants RBI to focus on inflation as crude prices harden

Concerned over worsening political turmoil in the Middle-East and the impact of rising global crude prices on the domestic economy, the Finance Ministry has suggested the Reserve Bank of India (RBI) to focus on steps to contain inflation.

An indication to this effect was given by Finance Minister Pranab Mukherjee to the RBI, which is slated to announce its mid-quarterly review of the monetary policy on March 17.

The central bank has for the seventh time since March 2010, raised the key policy rates to tame inflation, which of late has started declining.

However, with the surge in international crude oil prices following political turmoil in the MENA (Middle East and North Africa) region, it is unlikely that inflation would continue to fall in the months ahead.

Mukherjee in his address to the RBI Board last week stressed on the need for sustaining post-crisis economic recovery and growth momentum, while keeping inflation in check against the uncertainty of oil price rise.

"This (keeping inflation in check) is essential for furthering the government’s agenda on inclusive development," the Minister had told the central board of the Reserve Bank, headed by Governor D Subbarao.

Crude prices in the international market have escalated to $116 a barrel. India is 75% dependent on oil imports and such a spurt in price would have adverse affect on the economy.

The government and the RBI have been under pressure due to inflationary pressures in the economy, particularly the high food prices.

Food inflation, though moving downward, has been in double digits for the most of the current fiscal. The latest data puts the food inflation at 10.39% for the week ending February 19 in comparison to the year-long period.

Further, the headline inflation has also been declining; it stood at 8.23% for the month of January from 8.43% in December this fiscal. However, this is still much above the comfort level and the government expects it to descend further to 7% in March.

On its part, the government has taken several steps like banning exports of certain items like wheat and reducing or eliminating duties on some products to increase their availability in the domestic markets.

As a measure to boost investment in agri-infrastructure, Mukherjee in the Budget for 2011-12 announced extension of the Viability Gap Funding Scheme (VGFS) for public private partnership (PPP) projects for setting up storage capacities.

Besides, the government has also put on fast track the creation of additional 15 million tonne of storage capacity through PPP mode.