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Mumbai, News Delhi: India unveiled a series of measures on Tuesday to tame inflation and secure food supplies, including the central bank's second move this month to drain liquidity from the banking system.
The Reserve Bank of India (RBI), headed by governor Y.V. Reddy, is raising the cash reserve ratio (CRR) by 25 basis points to 8.25 per cent, its highest level in seven years, with effect from May 24, and it signalled it was ready to act again if price pressures continued to build.
"It is critical at this juncture to demonstrate on a continuing basis a determination to act decisively, effectively and swiftly to curb any signs of adverse developments in regard to inflation expectations," it said in its annual policy review.
Finance Minister Palan-iappan Chidambaram presented parliament with various measures, including an export tax on basmati rice to follow up on an existing ban on non-basmati rice exports.
He also announced a duty cut on imports such as ferro alloys aimed at bringing down steel prices and said there would be more to come in a few days.
Annual wholesale price inflation (WPI) reached 7.41 per cent in mid-April, the highest in three years, as policy planners the world over grapple with soaring food and raw material prices. Last week, inflation stood at 7.33 per cent.
Sensitive issue
India, which has about 260 million poor, is sensitive to rising prices because food often accounts for a much higher proportion of people's expenditure than in developed economies. Fighting inflation has become a top priority for the government as it heads towards a national election due by May 2009.
India's prime minister told a group of businessmen yesterday the world community had not done enough to bring down food and fuel prices.
"The diversion of land from food crops to biofuels and increasing use of available food grains and vegetable oils for the production of biofuels have greatly contributed to the rising food prices," Prime Minister Manmohan Singh said.
He said he was deeply dismayed by the global response to soaring energy prices, as world oil demand had risen by just one per cent annually over the past two years while crude oil prices had shot up by over 90 per cent in dollar terms.
Singh said the steps taken by the government - mostly export bans and duty cuts - to ease price pressures would show results in "the weeks and months to come" and that the normal monsoon rains predicted by the weather department should help.
The rupee fell to its lowest in about a month against the dollar after the blizzard of measures and the benchmark 10-year bond yield fell about 15 basis points on the day to eight per cent.
With inflationary pressures largely coming from the supply side, economists say there is a limit to what the central bank can do with monetary policy, especially as growth is slowing.
They did not rule out an interest rate rise in the future but expected the central bank would prefer to use the CRR - the proportion of funds banks must park with it - to control cash as a rate rise would force market rates up and could choke investment.
The central bank forecast economic growth would slow in the fiscal year that began this month to a range of eight per cent to 8.5 per cent from an estimated 8.7 per cent in 2007-08.
"They trimmed their growth expectations although I think the eight to 8.5 per cent they have is still pretty rich," said Rajeev Malik, an economist at JP Morgan in Singapore.
The latest CRR increase is effective from May 24. The central bank only raised the CRR earlier in April and half of that 50 basis point increase does not take effect until May 10. It said managing liquidity would continue to take priority and it aimed to push inflation back to "around 5.5 per cent" this fiscal year, but with the goal of lowering it close to five per cent as soon as possible.
Threats
In a mixed assessment, it said threats to growth and stability from global uncertainties had increased, and while the capital inflows that pushed the rupee up last year might continue, there was also the risk they could reverse suddenly.
Economists expected no change in rates, although the decision was seen as close.
The central bank kept its repo rate steady at 7.75 per cent and left the reverse repo rate, the rate at which it absorbs excess cash from banks, unchanged at six per cent.
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