The Hindu Business Line : Inflation rate higher than expected, admits RBI

THE Reserve Bank of India (RBI) Governor, Dr Y.V. Reddy, today admitted that the latest inflation rate at 7.5 per cent reported for the week ended July 24 was higher than what the central bank had originally expected.

In the Monetary and Credit Policy for 2004-05, the RBI had forecast that the inflation rate would be in a band of five per cent by the end of the fiscal.

"At the time of the announcement of the Monetary Policy May 2004, we expected an upswing in prices during this period. The inflation in July has now turned out to be higher than what we expected," he told newspersons on the sidelines of the first annual convocation of the post-graduate programme in Banking and Finance (2003-04) of the National Institute of Bank Management (NIBM) in Pune.

The RBI Governor stressed that the central bank was "monitoring the developments carefully".

He also pointed out that there was a significant component of "imported price shock".Dr Reddy also said that careful analysis of evolving circumstances was needed with regard to how the "shock" would turn out globally and how it would be absorbed domestically.

"We will respond to developments on an ongoing basis with a view to maintaining price stability over the year."

Dr Reddy said that both global and domestic factors had played a vital role in the recent surge in the inflation.

"Global factors played a critical part in this increase though domestic factors such as liquidity overhang and the monsoon conditions also played a role. Some increase was not unanticipated, but the increase in the price of commodities - especially relevant to our economy - has been significant."

The economy is going through a structural transformation and the credit offtake is picking up. "Our response would be measured based on these factors."