The Reserve Bank of India (RBI) on Thursday reiterated its concern over high inflation, saying it continues to be “at elevated” levels, hinting at a possible rate hike in its January review of monetary policy.
The Indian central bank has hiked its key rates six times so far this year to fight inflation, but left the rates unchanged in its December review. The inflation rate dropped to a 11-month low 7.48% in November but food inflation, a critical component of the overall inflation basket, rose sharply in December.
Food inflation surged to a 10-week high of 14.44% for the week ended 18 December against 12.13% in the previous week, due to high vegetable prices.
“Inflation, particularly food inflation, in India continues to rule at elevated levels reflecting in part the structural demand-supply mismatches resulting from, inter alia, rising incomes and changing consumption patterns,” RBI said in its second financial stability report.
The report, released half yearly, is published by the financial stability unit of RBI to assess the health of financial system to identify and analyze the potential risks to the economy. The first stability report was released in March.
On Thursday, both the finance minister and RBI officials expressed their concerns over high inflation and indicated more steps to check rising prices.
“This is an area of concern... earlier we thought that it is because of the base effect, but it is not merely the base effect. There has been real increase in the prices of certain food items,” finance minister Pranab Mukherjee said earlier in the day.
RBI deputy governor K.C. Chakrabarty, talking to reporters in Bangalore, said the central bank is prepared to take action to curb the high inflation. “RBI has already taken the measure. If the Reserve Bank feels the measure is not adequate, they (RBI) will take more measures.”
Announcing its mid-term policy review in November, RBI had said that the probability of further rate hike till January is relatively low.
Chakrabarty, however, said a pause doesn’t necessarily mean a complete stop. “Pause does not mean halt. You need to distinguish between pause and halt. Pause is not a halt,” Chakrabarty said.
On capital flows, the RBI report said that the dominance of portfolio flows is a “potentially worrying feature” of the flows.
“A potentially worrying feature of capital flows to India has been the dominance of portfolio flows which are prone to sudden stops and reversals,” RBI said.
So far in 2010, foreign investors have bought shares worth $28.8 billion (Rs.
1.3 trillion) in domestic equities.
The apex bank also said the stress tests conducted on credit, market and liquidity risks have indicated “a reasonable degree of resilience” of the banking sector in the country, but the asset quality of banks and their asset-liability management position continue to warrant monitoring.
Indian banks could withstand the shock of the global credit crunch in the wake of the collapse of US investment bank Lehman Brothers Holdings Inc. because of their high capital to assets ratio and low non-performing assets (NPAs). However, the industry’s NPA has been on the rise as many assets, which were restructured in 2009, giving stressed customers more time to pay up, are turning bad now.
The stability report also touched upon the recent crisis in the microfinance sector and said “recent concerns warrant closer examination”.
Microfinance institutions (MFIs) are under pressure in Andhra Pradesh following a state law that restricts their operations. MFIs, in the business of giving tiny loans to poor people, is also under the glare of the finance ministry and the banking regulator for charging high rates to customers.
Source: www.livemint.com
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