Inflation high of 7.4% worries UPA, RBI may hike CRR

Rise in Inflation to a 41-month high of 7.4% has Congress worried with election around the corner; RBI may hike CRR.

15 April, 2008

The Congress-led United Progressive Alliance (UPA) government is facing new challenges with the inflation in the country rising to a 41-month high. According to latest data available, the annual rate of consumer price growth is now 7.4% as on March 29, 2008. This is the highest rate since November 2004.

The rise in inflation has been driven by rising metal, food, and oil prices. The government had, in the first week of April 2008, announced a ban on exports of non-basmati rice and removed duties on imports of crude edible oils in a bid to control rising prices.

The inflation rate, based on the official wholesale price index, was at 7 percent a week ago. The new data shows that the government’s efforts had little impact on the rising commodity prices. On April 10, 2008, Prime Minister Manmohan Singh had raised a flag about the steep increase in prices of food and essential items. He said it would be a difficult task managing high inflation, and agreed that it could hurt the country's macroeconomic stability.

Meanwhile, the Reserve Bank of India (RBI) has been busy in shaping monetary and fiscal steps to contain inflation. It aims to contain inflation below the five percent mark for the later period. There is a possibility of increase in Cash Reserve Ratio (CRR) to control the supply of money in the financial system. However, there is growing concern in the industry that the present measures to contain inflation are more politically motivated rather than being linked to economic fundamentals. The inflation pressure is building on India mainly due to supply concerns.

But the Indian government is trying to address it through a reverse model. With General and Assembly elections round the corner, observers feel that the government does not want to take any risks. Analysts have alleged that the present move of the government to restrict exports and encourage free imports would hurt the industry in the long term. It would affect the competitiveness of the Indian industry globally. Also, the Indian industry is apprehensive about the move to hike CRR rate. They fear that this would cause an increase in credit off take.




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