Inflation in India is ‘artificially suppressed’ says the RBI

Finally the cat is out of the box , the RBI did some straight talking and outed a well known secret, in its third quarter review 2007/08.

Reserve Bank of India (RBI) on Monday said inflation in India was artificially “suppressed” as higher international oil prices have not been passed on to domestic consumers. And that practices of increased use of innovative credit instruments and complex layering of risk diffusion have taken the investor to become remote from the ultimate borrowers. Reliance only on rating agencies for risk assessment needs to be avoided  and that confidence is also falling in the strength of insurers that guarantee payments on bonds.

Net net what this mumbo jumbo means is that the RBI is worried about the ever  increasing debt burden that the Central govt has taken on its books to finance oil bonds, and its effect on the economy, and about the high oil prices.

Large scale FDI into Indian markets using advanced derivatives , enhanced risk taking  and the repercussions of large scale losses from US sub-prime mortgages on the world economies are also worrying the central bank.

The “elevated international food prices also pose potential inflationary pressures in the period ahead.”

Not only that, inflation data is based on WPI (Wholesale price index ) and not CPI (Consumer price index) , thus the real inflation is controlled by the govt using export restrictions and import duty cuts and waivers.

In India, inflation based on the wholesale price index (WPI) has remained below 4 per cent since mid-August 2007 , and RBI’s target is to contain inflation close to 5 per cent in 2007-08, but increase in retail prices of major transport fuels could lead to price levels breaching the comfort levels.

Overall the RBI is broadly hinting why it is against a rate cut at this juncture…

inputs from the business standard


8 thoughts on “Inflation in India is ‘artificially suppressed’ says the RBI

  1. I was going through the economic survey of India 2006-07… India still follows cash based accounting instead of accrued accounting….
    couple it with WPI.. i think indian govt is 5-6 decades behind the world when it comes to accounting and statistics.

    however i still feel that the pressure of Foreign reserves will force the govt to reduce interest rates

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