Realigning its growth target and inflationary expectations in its annual policy statement for the year 2008-09 on Tuesday, the Reserve Bank of India (RBI) has scaled down GDP growth projection for 2008-09 in the range of 8.0- 8.5%.
The central bank has targeted that inflation be brought down to around 5.5% in 2008-09, with a preference for bringing it close to 5% as soon as possible.
Going forward, the resolve is to condition the policy and perceptions for inflation in the range of 4-4.5 % in a way that an inflation rate of around 3% then becomes a medium-term objective.
RBI in its policy statement mentioned that it will accord high priority to price stability, well-anchored inflation expectations and orderly conditions in financial markets, while sustaining the growth momentum.
Swift response on a continuous basis to evolving adverse international and domestic developments through both conventional and unconventional measures will be used to meet this objective, it added.
Explaining the acceleration of inflation level, YV Reddy, governor, RBI noted that while aggregate supply capacities expanded and alleviated domestic macro-imbalances in 2007-08 to some extent, available indicators suggest that economic activity in India currently continues to be mainly demand-driven.
The pick-up in inflation during the fourth quarter of 2007-08 has mainly emanated from supply-side pressures such as the one-off increase in domestic petrol and diesel prices to partially offset the global crude oil price increase over the year; continuous hardening of prices of petroleum products that are not administered, rising prices of wheat and oilseeds and the adjustment in steel prices in March 2008 due to the surge in international prices.
The upsurge in inflation in India has occurred at a time when global commodity prices have been volatile at historically elevated levels and central banks in mature and emerging economies alike have been articulating heightened inflation concerns.
There are concerns that demand pressures, which have been reasonably contained so far, are being coupled with supply-side factors which, if not temporary, could impact domestic inflation significantly, said Reddy.
Continuing strong demand and dwindling stocks are reflected in a tight supply-demand food situation globally, leading to the emergence of food price inflation as a key risk to global stability.
The Food and Agricultural Organisation’s (FAO) global food price index, which rose by 40% in 2007 to the highest level on record, has continued to increase in the first quarter of 2008 as well, as world food stocks have fallen to their lowest levels in 25 years.
In the global foodgrains market, prices of major crops such as corn, soyabeans and wheat have increased by 58.2%, 86.3% and 56.5%, respectively, by April 25, 2008 from a year ago in response to surging demand.
According to the Energy Information Administration (EIA), tight fundamentals, reflected by low available crude oil surplus production capacity, combined with supply concerns in several oil exporting countries, have continued to put upward pressure on world crude oil prices.
Linking deceleration of Indian growth target to the global situation, Reddy said global economic activity decelerated somewhat in relation to earlier expectations, mainly on account of the slowdown in the US economy.
According to the World Economic Outlook (WEO) of the International Monetary Fund (IMF), the forecast for global real GDP growth, on a purchasing power parity basis, is expected to slow from 4.9% in 2007 to 3.7% in 2008.