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P. Devarajan

"GLOBAL uncertainties have increased," says the RBI Governor, Dr Y.V. Reddy, and firm crude prices could be the first if not the only uncertainty, ahead of the first quarter review on July 26.

International commodity prices have turned sober while the western financial markets may not turn stiff.

They will matter for India if the kharif and rabi crops do not come up to estimates.

Economic reforms have little chance of survival, if they are not yet dead.

In the Annual Policy Statement for 2005-06, on April 28, the RBI said, "The outlook for growth in 2005-06, which should be noticeably better than the previous year, may get moderated by the conditions in oil markets which remain tight."

Since then, crude oil prices have been on a sprint.

The RBI has pegged the inflation rate in 2005-06, on a point-to-point basis, in the 5-5.5 per cent range "subject to the growing uncertainties on the oil front both with regard to global prices and their domestic absorption."

A good monsoon will stub out a nagging worry, leaving the RBI to battle the fallout of crude oil prices (retail prices of petroleum products cannot stay static) if they continue to be quoted above $60 per barrel over the next few months.

The central bank may not switch on the alerts on July 26 preferring to wait till October when a slightly firm number can be put on the kharif crop.

The industry and farm sector should not be running short of funds as the RBI has said, "there is scope for accommodating continued growth in credit needs as well as the higher borrowing programme to the extent it is possible to unwind MSS to provide appropriate liquidity consistent with macro objectives."

But this release of funds may not gel with the concern for price normalcy defined at 5 per cent.

For the financial system, the retail loans portfolio of banks could spring leaks as real estate prices in most cities have become indecently prohibitive. In the event of the inflation rate topping 6 per cent, there could be high defaults on housing loans.

The sharp build-up in retail portfolio of banks has started worrying some of the saner bankers.

The government banks (unlike private banks) have not made a run for the equity markets nor will they be keen on commodity hedging.

Indications are that the RBI may prefer to wait on the relaxations suggested by the Report of the Internal Technical Group on Forex Markets.

No price-fix hedge for commodities is permitted currently though it has been favoured by the report.

A price-fix hedge enables an importer or an exporter to lock into a future price for a commodity planned for import or export without "actually having a crystallised physical exposure to the commodity.

The advantage of a price-fix is that it allows a firm to lock into a price when it is attractive, leading to better planning and raw material management."

Price stability could well be the lone concern for the RBI till the fiscal is out and as Dr C. Rangarajan has said, "of the various objectives, price stability is perhaps the one that can be pursued most effectively by monetary policy."

What has remained unstated is the RBI's discomfort with the management of the economy (if any) by New Delhi.

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