The central bank said the main challenge it is currently facing is adopting a ‘calibrated exit’ from the unprecedented monetary accommodation
Concerned over the continuing inflationary pressures, a Reserve Bank of India (RBI) report on Thursday said the primary objective of the monetary policy would be to ensure price stability, amid expectations that the central bank would raise short-term rates in its 27th July monetary review, reports PTI.
"Inflation pressure will remain", the RBI said in its Currency and Finance Report 2008-09, and pointing out that "important challenges for the monetary policy authorities would be (to) ensure financial stability, although price stability should continue as the primary objective of the policy."
The central bank said the main challenge it is currently facing is adopting a "calibrated exit" from the unprecedented monetary accommodation.
RBI's statement comes ahead of the monetary policy review, scheduled for 27th July, during which the central bank is expected to take steps to contain inflation, while ensuring adequate liquidity to the productive sectors of the economy.
After the deepening of the global financial crisis, RBI had cut its key rates to provide funds to the cash-strapped financial system. However, after the recovery, it started tightening policy to tame rising inflation since late last year.
The RBI had raised the key policy rates by 25 basis points each in March and April. It hiked the lending and borrowing rates (repo and reverse repo) to 5.25% and 3.75%, respectively. The cash reserve ratio or the amount of deposits banks have to park with RBI, was hiked to 6%.
The wholesale price-based inflation touched 10.16% in May. The food inflation, however, eased to 12.92% for the week ended 19th June from about 20% in December last year.
Even as food inflation eased substantially by nearly 4 percentage points during the week ended 19th June from over 16.90% a week ago, economists expect RBI to focus on taming inflation.
"Policy focus will remain on containing inflation. The Reserve Bank has to lean over demand pull inflation and it will have to constantly monitor demand," Yes Bank chief economist Shubhada Rao said.
Oil secretary S Sundareshan said the government had not decided to limit the subsidy on diesel to Rs1.50 per litre and pass on the remaining required hike to consumers. "The decision of the EGoM is that diesel price will be market-determined. The actual decontrol will happen in future", he added
Diesel prices will have to be hiked by another Rs3.14 per litre if the government is to implement its decision to decontrol diesel rates, like it has done in the case of petrol, reports PTI.
When an Empowered Group of Ministers (EGoM) on 25th June decided to raise diesel price by Rs2 per litre in preparation for an eventual freeing of rates from government control, the gap between domestic rates and the imported cost was over Rs3.50 per litre.
The calculations done on 25th June were mostly based on the average international price in the first fortnight of June.
After the hike, the gap had narrowed to just Rs1.50 a litre.
"Today, the under-recovery on diesel is Rs3.14 per litre," Indian Oil Corporation (IOC) chairman B M Bansal said on Thursday.
This is because from 1st July, the rates are calculated on the basis of the average of the second fortnight of June, when global oil prices had firmed up.
Mr Bansal said the under-recovery on kerosene is Rs15.60 per litre, while it is Rs201.80 per 14.2-kg liquefied petroleum gas (LPG) cylinder.
IOC, Bharat Petroleum and Hindustan Petroleum were projected to lose around Rs53,000 crore on selling fuel below cost this fiscal after the EGoM decision to free petrol price led to a Rs3.50 a litre hike in the rates in Delhi, an Rs2 per litre increase in diesel prices, an Rs3 per litre rise in kerosene rates and a Rs35 per cylinder increase in the cost of LPG.
But the industry is now projected to lose Rs57,700 crore this fiscal on selling diesel, LPG and kerosene below cost, with IOC alone projected to lose Rs32,250 crore in 2010-11.
Oil secretary S Sundareshan said the government had not decided to limit the subsidy on diesel to Rs1.50 per litre and pass on the remaining required hike to the consumers.
"The decision of the EGoM is that diesel price will be market-determined. As of now the price has been raised by Rs2 per litre. We are following that," he said.
The actual decontrol will happen in "future", he said, without giving a timeline.
The talks of limiting subsidy on diesel to Rs1.50 per litre was a "personal opinion" of chief economic advisor Kaushik Basu, he said.