RBI left all key rates intact and reiterated its views on dangers of inflation to economy.
Bank Rate has been left unchanged at 6 per cent, reverse repo and repo rates were held steady at 6 and 7.75 per cent respectively, while Cash Reserve Ratio (CRR) remain unchanged at 7.5 per cent.
RBI also reinforced the emphasis on price stability as the key challenge and to keep a close watch on evolving global uncertainties and its impact on domestic situation.
Releasing the review, RBI Governor Y V Reddy said indications are getting stronger of upside inflationary risks in the period ahead. Elaborating, he said, exclusion-based measures — such as WPI (whole sale price index) excluding food and energy, place inflation higher than the headline, indicative of underlying aggregate demand pressures.
Fuel prices
Secondly, it was noticed that favourable effects of cuts in petrol/diesel prices in 2006-07, which facilitated benign inflation conditions, have ceased since December 2007. Prices of non-administered petroleum products (naphtha, furnace oil, aviation fuel and the like) have increased in the range of 28-37 per cent.
Accordingly, fuel prices, even if unchanged, are set to drive up headline inflation going forward, in contrast to their dampening role hitherto.
“In view of the new highs to which international crude prices have recently been lifted, threats to domestic price stability have risen and turned extremely volatile, representing a serious risk to inflation expectations” Mr Reddy said briefing reporters here.
On interest rate differential between India and US, Mr Reddy said “for US, issue is slowdown.... for India it is moderating inflation. As far as liquidity goes, US problem is pumping liquidity whereas in India it is absorbing liquidity. The problems are different for the two countries.”
Mr Reddy, however, conceded that interest rate differential is relevant, but there are other factors (at play) in India. “We would like to watch and move in any way, whatever that way may be.” RBI projected 8.5 per cent GDP Growth in 2008-09 and inflation of around 4-4.5 per cent.
