The Hindu Business Line : Inflation may not attain downward bias: RBI

THOUGH the Reserve Bank of India maintains its inflation forecast range of 4-4.5 per cent, the downward bias "may not be attainable,'' said RBI's recently published, Report on Currency & Finance 2002-03.

According to the report, the uncertainty of global oil prices and likelihood of rising inflation in many advanced countries could lead to higher inflation in India.

The RBI's mid-term policy review in November 2003 had indicated an inflation forecast of 4-4.5 per cent with a downward bias. However, the inflation rate has been rising steadily in recent months and the point-to-point inflation rate was at 6.1 per cent in the first week of January.

According to the report, the magnitude of price rise in the past two months has been above the original expectations. This increase in inflation appears to be mainly on account of rise in prices of crude oil, cotton textiles and oil seeds.

"The outlook for oil prices in the near term appears highly uncertain... The fear of deflation in advanced economies has been replaced by a possible upward pressure, led by increases in commodity prices. These international developments enhance the probability of transmission of inflation from abroad to India.''

There are optimistic expectations from the industry. Said Mr Kishlaya Pathak, Economist (India), Standard Chartered Bank, "We expect the average inflation rate to be at 5 per cent for this fiscal and the coming one. Our expectation is that oil prices will be steady and that the global recovery will not lead to any significant rise in inflation rate in 2004.''

"RBI is not saying that the average inflation rate will be 4-4.5 per cent, the central bank only says that it will touch that level by March-end, which seems possible. Even if inflation were to rise further from 6.1 per cent registered early this month, there will be no immediate impact on the interest rates of government bonds or on the nascent pick-up in the investment climate in the country,'' Mr Pathak said.

The RBI report further elaborated, "Two important international factors have contributed to the more than unanticipated upward pressure on prices... Firstly, global oil prices were 10 per cent higher than they were at the time of the mid-term policy review. Secondly, world primary commodity prices have also increased in 2003.''

On the other hand, these international factors could be countered, the report added.

"There are three favourable factors to counter these recent adverse global developments. First, in the normal course, it is expected that the inflation rate would fall in the period mid-January to March 2004. Second, there are cushions, in terms of food stocks and ample forex reserves. Third, the Indian economy has, in recent years, shown remarkable resilience in absorbing shocks.''

On the investment climate front, the report noted that there are no signs of a clear increase in investment. "The investment climate has improved in the recent months. However, there is not yet adequate evidence of a clear increase in investment demand,'' it stated.

"There are reports that corporates are now relying more and more on internal resources, and hence incremental pressure on credit demand may appear with a time lag. Resource mobilisation by corporates in the primary market has actually been lower during the year, but there is now expectation of increased activity in the IPO market in 2004,'' it continued.

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