RBI indicates further tightening in policy actions

Mumbai, Aug 31: Ripples of inflationary risks owing to higher asset prices and larger capital inflows, coupled with the surplus liquidity, may prompt the Reserve bank to return with further policy actions, which may include another hike in Cash Reserve Ratios (CRR). Indications of further tightening in policy stance were evident in RBI's annual report yesterday with the regulator contemplating higher food prices as a provocative factor in pushing up the consumer price inflation ahead of wholesale inflation.

While the headline inflation, based on movements in Wholesale Price Index (WPI), moderated to 4.1 per cent in August from 5.9 per cent in March this year, consumer price inflation was placed at 5.7-7.8 per cent in June as against 6.7-9.5 per cent in March.

''Although inflation has eased since March end, inflationary pressures could potentially persist for several reasons.

Accordingly, a continuous vigil supported by appropriate policy actions by all concerned would be needed to maintain price stability so as to anchor inflationary expectations on a sustained basis,'' said RBI in its annual report.

However, the headline inflation, which has been softened to 3.94 per cent as on August 18 from 4.10 per cent last week, is still hovering higher compared to other emerging markets and to advanced economies in 2006-07, and posing concern for the government.

Reserve Bank is also cautious over the hardening of oil prices and about the inflationary pressures emanating from ''strong growth in monetary aggregates, elevated asset prices and larger capital inflows'' claiming impact on domestic liquidity conditions.

In its policy review last month, the central bank had hiked the CRR to 7 per cent from 6.5 per cent with a view to drain cash in the system.

The Reserve Bank had also placed the real GDP growth for 2007-08 at around 8.5 per cent assuming no further hike in crude oil prices and barring domestic and external shocks.

However, a 28 per cent hike came about in crude oil prices last year, and high volatility in world markets is expected to prompt the Reserve Bank to come up with more policy actions, opined senior bankers.

UNI