RBI sees Inflation Contained at 5.0 - 5.5%

HYDERABAD, SEPTEMBER 2:  Inflation will be contained in a range of 5.0-5.5 per cent in the financial year to March 2007, its RBI Governor said on Saturday.

Although the central bank does not have a mandate to target inflation, it has estimated inflation to end at 5.0-5.5 per cent in the financial year that ends on March 31.

"As of now, based on all the evidence we have, we believe it would be possible to contain inflation for the current year at 5.0 to 5.5 per cent as has been indicated in the policy," Governor Yaga Venugopal Reddy said.

Headline inflation, as measured by wholesale prices, is running at nearly 5 per cent annually and the central bank has raised interest rates three times this year to curb inflation pressures in the robustly growing economy.

The benchmark short-term rate was last raised in late July by 25 basis points to 6.0 per cent. Reddy said at the time the authorities would take every measure to contain inflation in the 5.0-5.5 per cent range.

The central bank said earlier this week that inflation pressures remain as state-controlled local fuel prices have not kept pace with global crude prices.

The price of crude oil, India's biggest import, has risen nearly 15 per cent this year but the government has only allowed refiners to raise retail prices of petrol and diesel by 7-8 per cent.

Reddy said there was no link in terms of the timing of oil price increases and monetary policy measures and added the measures took several things into account.

He said policy had a lagged impact in containing money supply, which is growing at 20 per cent, and expansion in credit, which is about 30 per cent year-on-year.

The federal fiscal deficit widened to 864.04 billion rupees ($18.58 billion) in the first four months of this fiscal year, making 58.1 per cent of the full-year target.

Reddy said however that he expected the government's borrowing programme to remain in budget.

"Therefore on that assumption we believe that the borrowing programme for both central and state governments can be conducted smoothly as in the past."

The government expects the federal fiscal deficit this financial year to be 3.8 per cent of gross domestic product, down from 4.1 per cent in 2005/06.

The central bank sees economic growth at 7.5-8.0 per cent this year and Reddy said it saw no need to review that forecast.

He said it was not clear whether the US economy would slow down considerably although there was a widespread perception that it would.

"If there is some slowdown there may be some impact on the emerging market economies. However on the basis of our analysis we believe that any possible adverse impact in the case of India will be minimal," he said.