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RBI: Fiscal Steps Help But...

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The Reserve Bank of India (RBI) said on Monday a slew of steps taken by the government to contain price pressures in the economy should help curb inflation, but risks from high oil prices remained.
In a report a day ahead of an interest rate decision, it said global food prices were likely to remain firm as supply side pressures did not appear to be abating.
The report, on macroeconomic and monetary developments in 2007/08, noted freely priced fuel items such as naphtha had increased substantially since February 2007 alongside rising global oil prices, while prices of petrol and diesel, which are government-controlled, had partially adjusted.
But prices of kerosene and cooking gas had not been raised by the government for several years. "Thus inflation risks on account of oil prices remain incipient," it said.
The RBI is expected to leave its key interest rates steady at its annual review on Tuesday, although a Reuters poll last week showed the decision was too close to call.
Inflation, as measured by wholesale prices, has accelerated above 7 per cent on an annual basis to its highest levels in more than three years, due in part to rising global prices of commodities, which are outside the central bank's control.
The RBI noted the Indian basket of international crude prices had jumped to $99.3 a barrel in March 2008 from $56.6 in February 2007.
Price pressures have been coming largely from the supply side and economists say there is a limit to what the central bank can do, especially as economic growth is slowing.
But the report noted there were some demand-side pressures. Domestic iron and steel prices saw a sharp increase in line with recent hardening in international steel prices, it said, while cement price rises could be attributed largely to strong demand from construction domestically.
The RBI has left its repo rate, at which it lends cash to banks, at 7.75 per cent for the past year.
Earlier in April it announced it was raising its cash reserve ratio (CRR), the proportion of funds banks must keep with it on deposit, to 8.0 per cent in two stages to drain inflation-stoking excess cash from the banking system.
The move followed a flurry of fiscal steps by the government, which is worried about the political fallout from soaring prices, to dampen pressures, including a ban on exports of non-basmati rice and cuts in import duties on edible oils.
Elections for many state legislatures are due this year and national polls are scheduled for next year at the latest.


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