The Macroeconomic and Monetary Developments mid-term review 2008-09 release by the Reserve Bank of India said that even if the inflation was expected to rise as per the earlier assessment, the size and pace of the subsequent change was clearly unanticipated.
The extraordinary global developments triggered by the bankruptcy/sellout/restructuring of some of the world?s largest financial institutions since September 2008 resulted in a sharp deterioration in the global financial environment. These new developments impacted domestic money and foreign exchange markets with a marked increase in volatility and a sharp squeeze on market liquidity as reflected in the movements in overnight interest rates and the high recourse to the LAF, the report said.
On a review of the liquidity situation in the context of global and domestic developments, the CRR was reduced by a total of 250 basis points to 6.5% with effect from the fortnight beginning October 11, 2008. It was also noted that these measures would be reviewed on a continuous basis in the light of the evolving liquidity conditions. Against the backdrop of the indirect impact of the global liquidity constraint on the domestic credit markets, the RBI announced a reduction of LAF repo rate by 100 basis points to 8% effective October 20, 2008. The overall stance of monetary policy in 2008-09 would continue to accord high priority to price stability, well-anchored inflation expectations and orderly conditions in financial markets while being conducive to continuation of the growth momentum.
However, there has been some moderation in the prices of freely priced petroleum products and edible oils/oil cakes over end-June 2008. On a year-on-year basis, 12 items/groups – rice, wheat, milk, raw cotton, oilseeds, iron ore, coal mining, minerals oil, edible oils, oil cakes, basic heavy inorganic chemicals and metals – with a combined weight of about 35% in the WPI basket accounted for almost 69% of headline inflation as on October 4, 2008 (as compared with 65% a year ago).
The y-o-y inflation, excluding fuel, was at 10.6% as on October 4, 2008 as compared with 4.7% a year ago. The annual average WPI inflation rate (average of 52 weeks) also increased to 8% as on October 4, 2008 from 5.8% at end June 2008 and 4.7% at end-March 2008 (5.3% a year ago).
Despite these easing, prices of freely-priced petroleum products increased by 9-39% between end-March 2008 and October 4, 2008. Overall, prices of minerals oil increased by 22.6%, year-on-year, as on October 4, 2008 as against a decline of 2% a year ago. In this context, it may be noted that international crude oil (Indian basket) prices increased by 72% from $56.6 a barrel in February 2007 to $ 97.2 a barrel in September 2008.