Just a few days before the monetary policy decision of the Reserve Bank of India, the Finance Ministry said that India needs to be alert on the inflation front. Rising fuel prices, weakening rupee and the risk of a below normal monsoon may again increase pressure on prices. In its monthly economic review for May, the Department of Economic Affairs said the economy remains “cautiously strong”. Despite increasing global and domestic uncertainties, domestic fundamentals remain largely stable. The ministry said that in view of high global energy prices, falling rupee, increasing production cost pressure and the possibility of a below normal monsoon – all these things require constant policy vigilance.
Policy will be announced on June 5
This assessment has come before the meeting of the Monetary Policy Committee of RBI next week. The policy decision is going to come on June 5. Amidst inflationary pressure and efforts to support the rupee, expectations of a tight monetary policy have increased. Earlier this month, the rupee had hit a record low of around 97 against the US dollar. Although retail inflation in April remained below the RBI target of 4 percent, the ministry cautioned that wholesale price pressure has increased rapidly. This has increased the risk that the increase in production costs may ultimately impact consumer prices as well.
Tremendous increase in wholesale inflation
In April, productive inflation reached its highest level in more than three and a half years. The biggest reason for this was the prices of crude oil, which had increased the manufacturing cost. Data from the Ministry of Commerce and Industry showed that the Wholesale Price Index (WPI) increased by 8.30 percent on a year-on-year basis. This is much higher than March’s figure of 3.88 percent and also above economists’ estimate of 5.50 percent. The ministry also warned that the outcome of the ongoing conflict in West Asia could pose significant risks to India’s inflation and external sector outlook – particularly due to disruptions in energy supplies.
Finance Ministry’s advice
The ministry said the duration of the blockage in the Strait of Hormuz will remain ‘the single most important factor for India’s external and price outlook’. According to the review, high crude oil prices, tightening of global financial conditions and slowing economic growth across the world are all creating difficulties for the Indian economy. The Indian economy cannot be completely protected from external shocks. The ministry said that to deal with this mixed period of uncertainty – whether it is due to external reasons or climate related reasons – policies will have to remain flexible on all three fronts – monetary, fiscal and structural. At the same time, medium-term development goals will also have to be kept in full view.
