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This time it's not food inflation
Thu, 22 Apr Pre-Open

In another first of sorts, the central bank of India has set a trend most of its peers would find hard to follow. That of sharing its logic behind using monetary tools. But that's not the end of it. Since the last quarter, the RBI has also invited comments and suggestions from researchers on how it can better broadcast economic data.

In its second such interaction with us, the RBI governor Dr Subbarao spoke at length on his prime concerns. The former Ministry of Finance official also explained in detail as to what exactly is stoking inflation despite cooling food prices. According to him, it is no more food but manufactured goods that are governing price rises. He also fears that an erratic monsoon could result in further shortage of food. This coupled with increased demand for non-food products could make the RBI's job more challenging. Nonetheless, the RBI is now determined to measure inflation at consumers' level as also publish data on an ongoing basis. This is against its current practice of setting year end targets. For instance, the RBI's inflation (WPI) target for March 2011 is 5.5%.

Besides manufactured goods, rising interest costs may also weigh heavy on your budget. With the RBI getting increasingly worried about managing excessive capital inflows, interest costs are bound to move up. The credit to infrastructure projects has risen from 8% to 13% of bank loans in the past year. These will also be funded largely through higher cost deposits.

Other key factors that could affect RBI's inflation fighting are the global economic recovery and commodity prices. The RBI does not expect the recovery of developed economies to be very smooth. Having said that, the rise in commodity prices paints a very uncertain picture.

However, what is enthusing is that the RBI is not being a silent spectator to economic chaos unlike its peers in the US. In a much regulated manner, the Indian central bank is taking steps in the right direction. Be it managing liquidity to accommodate government borrowings or controlling volatility in forex rates. Call it baby steps or anything else; we believe the well timed moves can save many blushes in the days ahead.

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