Reserve Bank’s monetary policy review scheduled TODAY, 29 July 2008.

RBI plans tough steps to check price rise
29 Jul, 2008, 0629 hrs IST, TNN
The Reserve Bank of India (RBI) will continue to take harsh measures to check demand to control inflation in the country. In its Macro Economic and Monetary Development report, RBI said with WPI-based inflation hardening, an adjustment of overall aggregate demand is needed.

It said that monetary policy has to address the aggregate demand pressure, which appears to be strong. The central bank statement clearly indicates that it might increase the interest rate on Tuesday, when it will review its credit policy.

The review also pointed out that India's budget deficit may come under pressure in 2008-09 as the government boosts spending. Government finances will be hit by "higher oil subsidies and the burden of debt waiver to farmers," RBI said in the report. Salary increases for its employees may also widen the shortfall, it said.
A ballooning budget deficit may force RBI to raise borrowing costs to prevent higher government spending from stoking prices. It will also limit PM Manmohan Singh's scope to introduce further policy measures to tame inflation running at a 13-year high.

Spending by India's government registered a "sharp rise" in April-May, the first two months of the current fiscal year, the central bank said. The government's budget deficit target for this year is 2.8% of gross domestic product.

"International crude prices are expected to remain at elevated levels," the report said. "High and volatile international crude oil prices, thus, pose a major risk to the global inflation outlook," it added.

Controlling inflation will continue to be the major focus of the policy. However, it will also continue to maintain appropriate liquidity in the system such that all legitimate requirements of credit are met. But, the availability of liquidity should be consistent with the objective of price and financial stability.

The liquidity conditions in the system, the report said, eased during the first week of July, mainly on account of a decline in the cash balances of the central government. But, the liquidity condition tightened significantly thereafter mainly due to two-stage hike in CRR in June, the report pointed out.
VIA:E.T