RBI raises CRR, repo rate by 50 bps to rein in inflation

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Mumbai, Jun 24: outlined the central bank’s perceptions on the price situation, making it clear that India would now have to adjust to a new reality and that the high energy prices may not be temporary. RBI, he had said, would continued to take “determined and calibrated” measures with a focus on managing inflationary expectations.

“In view of the criticality of anchoring inflation expectations, a continuous heightened vigil over ensuing monetary and macroeconomic developments is warranted to enable swift responses with appropriate measures as necessary, consistent with the monetary policy stance,” the central bank said on Tuesday, explaining the rationale behind the twin measures on CRR and repo rate. The measures, RBI said, had been taken “consistent with the stance of monetary policy as set out above and on the basis of incoming information on domestic and global macroeconomic and financial developments.”

The detailed statement said important developments had taken place in recent weeks with regard to inflation. “To assess these developments, it is important to recognise the key forces at work. The escalation in inflation last week mainly reflects the pass-through of international crude prices to domestic prices effected on June 5, 2008. Unlike in some mature economies, however, the pass-through is not occurring on a continuous basis in developing economies including India. Thus, the policy response to the escalation in crude prices could be somewhat similar to other countries but tailored to suit our conditions.”

Setting out the backdrop to the measures, the central bank said, besides oil prices, there are some underlying inflationary pressures impacting inflation in India. Inflation, based on variations in the wholesale price index (WPI) on a year-on-year basis, increased to 11.05% as on June 7, 2008 from 7.75% at end-March 2008 and 4.28% a year ago. Excluding the fuel sub-group, inflation rose to 9.61% from 5.92% a year ago. Excluding fuel and food, inflation was 10.33% as against 6.33% in the corresponding period of the preceding year. Inflation based on the consumer price index (CPI) for industrial workers (IW) and urban non-manual employees (UNME) stood at 7.81% and 6.99%, respectively, on a year-on-year basis in April 2008 as compared with 6.67% and 7.74% a year ago. Inflation based on CPI for agricultural labourers (AL) and rural labourers (RL) stood at 9.11% and 8.84% in May 2008, respectively, as compared with 8.22% and 7.90% a year ago.