High inflation rates a cause for concern

Macroeconomic and Monetary Developments: Second Quarter Review 2009-10

Although year-on-year inflation is still only 1.2 per cent, strong upward trends seen in the Wholesale Price Index (WPI) inflation and the persistence of high Consumer Price Index (CPI) inflation are a cause of concern, the Reserve Bank of India (RBI) said in its pre-monetary policy review today.

The WPI inflation has risen by 5.9 per cent over its end-March 2009 level, while CPI inflation has been in double-digits for the past few months.

The recent increase in the WPI was largely because of the upward revision of prices of petrol and diesel, increase in prices of freely priced fuel products and higher prices of sugar, vegetables and medicines.

According to the Reserve Bank of India (RBI), CPI inflation persisting at high levels could lead to inflation, as wages and prices would come under increasing pressure of upward revision as pricing power and wage bargaining in the economy gradually returned.

Other factors that could contribute to inflationary pressures are high inflation in food and essential commodities, limited import options for specific commodities and the risk of a further increase in minimum support prices (MSPs) of agricultural crops.

“Given the supply-side sources of emerging inflationary pressures, the policy focus needs to be directed at improving both supply conditions and supply chain for more efficient distribution,” RBI said.

On the other hand, the sources of comfort on the inflation front could be a persistence of negative output gap, weak aggregate demand as well as stabilisation of international oil prices over the last few months.

The recent deceleration in broad money growth despite the accommodative monetary policies of the central bank was a positive sign, RBI said.

Effective use of the high stock of foodgrains with special focus on improved distribution, a better harvest during the rabi season and selective import of certain commodities would further contain inflationary pressures, according to RBI.