The central bank will respond 'swiftly' and use monteary tools to contain runaway inflation, which could dampen the growth momentum, Reserve Bank of India deputy governor Rakesh Mohan said on Tuesday.
Inflation has firmed up through out the year, currently ruling at a two-year high of 6.58 per cent, and is above indicative projections (5 to 5.5 per cent). Inflation, in terms of consumer prices, is even higher in the range of 7-8 per cent, Mohan said in his address at the Global Conference of Actuaries in Mumbai.
RBI in its third quarter review monetary policy had spelled out its aim to bring down inflation as close as possible to 5.0-5.5 per cent at the earliest, while continuing to pursue the medium-term goal of a ceiling on inflation at 5.0 per cent.
The surge in price of fuels, metals and cereals including wheat coupled have contributed significantly to inflation in 2006-07. Accounting for a third of headline inflation, they (primary articles) can be interpreted to originate from supply side pressures, the deputy governor said.
The inflation is a tax on the poor against which there are no hedges available. Consequently, ensuring price stability is a societal compulsion to which monetary policy must be committed. The steps taken in Q3 review are meant to sustain growth process, while ensuring a minimum social insurance by delivery of a tolerable rate of inflation, he said.
In conjunction with emerging strains on capacity, elevated asset prices and the surging demand for bank credit, the rising prices of manufactures have also put the demand pressures on inflation, he said.
Referring to the high growth in bank credit, Mohan said RBI has a overriding concern about the quality of advances. It has consistently emphasised close monitoring of the health of credit portfolios and non-performing assets.
The sharp increase in credit to housing, commercial real estate and retail loans have also been worrisome owing to the vulnerability of banks to credit concentration risks, he said.
As a consequence, RBI has jacked up the provisioning for standard assets in sensitive sectors such as real estate and personal loans to 2 per cent from 1 per cent.
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