`Upward pressure on inflation'

Our Bureau

Mumbai, Oct. 30

Ahead of the credit policy tomorrow, the RBI has warned of inflationary pressures while demand for bank credit continued to hold strong in the second quarter of 2006-07.

In its Macroeconomic and Monetary Developments Review released today, non-food credit grew 30.5 per cent as on October 13 against 31.8 per cent last year. Food credit declined Rs 7,246 crore reflecting, "lower order of procurement of foodgrains (less than around 15 per cent)."

Funds to the industrial sector grew 27 per cent, while that to the agricultural sector went up by 37 per cent as of end-June 2006. Retail lending rose by 47 per cent with growth in housing loans placed at 54 per cent. Loans to commercial real estate rose by 102 per cent, said the RBI report.

Deposit growth

Deposit growth was slower at 22.1 per cent as on October 13 as against 24.2 per cent a year ago. Growth in time deposits at 20.2 per cent was higher than 17.5 per cent in the previous year and this was due to higher interest rates, tax benefits and base effect, explains the report.

The RBI contends liquidity remained comfortable in the second quarter till mid-September. From the second half of September, money turned tight on advance tax outflows and festival season currency demand amidst high credit off-take. The RBI absorbed liquidity through reverse repos (banks placing funds with the RBI against securities) of Rs 36,857 crore during July-September 2006 as compared to Rs 51,490 crore in the previous quarter.


Underlying inflationary pressures continued, though headline inflation remained within the indicative trajectory, said the RBI.

Inflation has been driven largely by prices of primary food articles. "The impact of mineral oils, which has been the major driver of inflation over the past two years, petered out by early September 2006 on the back of base effects," the RBI report states.

The fuel group's inflation rate moderated to 3.3 per cent year-on-year as on September 16 (domestic prices of petrol and diesel were increased by 6-7 per cent in September 2005). Prices of primary food articles led by wheat, pulses, fruits and milk have placed upward pressures on headline inflation in 2006-07.

primary articles

Overall prices of primary articles have increased by 9.6 per cent since end March 2006 and by 7.5 per cent over last year. The year-on-year inflation (excluding the fuel group at 5.1 per cent) as on October 7 was marginally lower than the headline rate. The pass-through of higher international oil prices has been restricted to petrol and diesel, said the RBI. Domestic prices of liquefied petroleum gas have remained unchanged since November 2004, while kerosene prices have been unchanged since April 2002 on social concerns.

Consumer price inflation (CPI) has raced ahead of WPI inflation since November 2005, "reflecting the higher order of increase in food prices as well as the higher weight of food items in the CPI," the report adds.

At the same time, the combined revenue deficit of the Centre and State governments is expected to decline in 2006-07 following a reduction in revenue expenditure (by 0.5 per cent of GDP) and improvement in revenue receipts (by 0.3 per cent of GDP). Revenue is expected to be higher on higher tax collections, especially direct taxes. However, sluggishness in non-tax revenues could be offsetting.

(This article was published in the Business Line print edition dated October 31, 2006)
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