The Hindu Business Line : Inflation outlook uncertain on rising oil prices: RBI

AS global crude oil price increases are here to stay the outlook for inflation remains uncertain, said the Reserve Bank of India in its Macroeconomic and Monetary Developments for the third quarter.

In India, inflation and inflationary expectations remained well contained during the quarter ended December 2005.

Despite hikes in petrol, diesel and electricity prices in June 2005, a series of monetary and fiscal measures by the RBI helped in reigning in inflation and inflationary expectation during the fiscal, the central bank said.

"A hike in the reverse repo rate by 25 basis points (bps) to 5.25 per cent in October 2005 especially in the context of developments in the oil economy, in addition to 50 bps increase in Cash Reserve Ratio during September-October 2004 and an increase of 25 bps each in reverse repo rate in October 2004 and April 2005 indicated the resolve of the monetary policy to contain inflation in the projected rage of 5-5.5 per cent," it said.

Inflation: Inflation outcome in 2005-06 has been dominated by the price movements of commodities such as vegetables, iron and steel and petroleum products.

These commodities with a combined weight of about 12 per cent in the Wholesale Price Inflation basket contributed to more than half of the headline inflation rate of 4.4 per cent on December 31, 2005. Mineral oils inflation alone accounted for one-third of inflation.

The RBI also said domestic petroleum products prices have lagged the increase in international crude oil prices, with the burden being shared by the oil companies and the Union Government.

The pass through of higher international oil prices has been restricted mainly to petrol and diesel.

Domestic prices of liquefied petroleum and kerosene oil have remained unchanged during the year so far.

The RBI said inflation pressures, which had increased in the third quarter of calendar year 2005, moderated somewhat in a number of economies in the fourth quarter with some easing in energy prices.

It, however, continues to be at elevated levels, above the targets of many central banks.

Although the second round effects of recent oil hikes have been muted so far and core inflation remains low, the prospect of a higher second round pass-through has prompted a number of central banks to tighten monetary policy during the recent months to contain inflation and inflationary expectations.

In India, equity and gold prices recorded sharp increases during the quarter ended December 2005. Corporate profitability remained strong and profits after tax increased by 41.3 per cent in April-September 2005.

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