The Reserve Bank of India in its annual report released on Monday stated that the outlook for headline inflation is less optimistic than what was envisaged at the beginning of the year.
Under assumptions of no significant supply shocks and appropriate management of liquidity, the central bank had earlier placed the inflation rate at around five per cent for 2004-05.
However, at this point of time, the inflation rate needs to be reassessed on the back of the monsoon scenario and international non fuel commodity prices which are expected to ease by the year end.
In view of the downside risks emanating from uncertain monsoon and possible persistence of high and uncertain oil prices, a possibility of downward bias to the earlier estimates of GDP is also possible, says the report.
"The outlook on inflation during 2004-05 seems to get revised as against the earlier projection of 5 per cent by the Reserve bank of India depending on the progress of the south west monsoon and fuel prices. Moreover the international non fuel commodity prices would also have a critical bearing on the outlook," stated the report.
This is because the distribution of rainfall in various parts of the country up to July 2004 has raised some concern about the possible impact on primary agricultural commodity prices.
However, the food stock and foreign exchange reserves should provide a cushion against any pressure on food prices.
Therefore according to the report, the RBI is monitoring the price situation by taking lead information from multiple indicators like money, interest rates or rate of return in different markets, fiscal position, trade capital flows, exchange rate, refinancing and transactions in foreign exchange among others.
It maintained that with increasing globalisation of the Indian economy, the pass through of international prices to domestic inflation is becoming increasingly evident.
Therefore international commodity prices and demand supply situation in key commodity are under close monitoring for gauging the impact on the domestic inflation process.
The hardening of the inflation in the recent past has been on account of the influence of international price movements in crude oil and metals particularly iron and steel.
The report further mention that the overhang of liquidity would also need to be carefully monitored in view of its potential to pose demand pressures on prices.
It has among other things enlisted possible gaps in availability of oilseeds, edible oil and cotton as domestic factors having a bearing on the inflation outlook.
The RBI is of the view that price pressures could be a cause of concern though it remains to be seen how the imported price shocks would evolve globally and absorbed domestically.
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