Date:25/07/2006 URL: http://www.thehindubusinessline.com/2006/07/25/stories/2006072503560600.htm

Back Inflation within projected range: RBI

Our Bureau

Chennai , July 24

Headline inflation remained within the indicative trajectory during the first quarter of fiscal 2006-07 despite higher oil and food prices, the Reserve Bank of India, said in its first quarter review of Macroeconomic and Monetary Developments. The RBI had indicated in its Annual credit policy announced in April 2006 that inflation would be in the 5 - 5.5 per cent range.

The wholesale price inflation was 4.7 per cent on July 8, 2006 as compared with 4.5 per cent a year ago. Consumer price inflation was at about 6.4 per cent at the end of May 2006.

The report said that while core inflation (i.e. rate of inflation excluding food and oil prices) and inflation expectations had so far remained benign, both had started edging up in recent months. High oil prices had forced several central banks to tighten their monetary policies recently. The report indicates that oil prices are expected to remain firm (probably closer to $69 per barrel).

The report points out that domestic oil prices continue to lag behind the increase in international prices.

deposits/ loans growth

Bank deposits and loans showed robust growth - although the phenomenon of absolute loan growth running ahead of deposit growth seemed to be halted. Deposits for the system grew by Rs 66,298 crore while loans grew by Rs 40,789 crore in the first quarter. Comparatively, in the corresponding quarter of the previous fiscal, deposits had grown by Rs 20,386 crore while loans had grown by Rs 26,053 crore. Most banks increased their deposit rates by about one percentage point during the quarter.

The report said that according to disaggregated data compiled for the previous fiscal, 30 per cent of the incremental credit went to the industrial sector while 14 per cent went to housing loans and 12 per cent to the agricultural sector.

Aggregate housing loans at the end of March 2006 was at Rs 1,86,429 crore.

The report said, "Credit to the housing sector continued to be strong, benefiting from low interest rates and tax incentives. Credit to the commercial real estate continued to increase sharply constituting around 3 per cent of the incremental non-food credit."

Banks' investment in government securities that had recorded a decline in the previous quarters (as banks unwound holdings to put money into loans), once again saw an increase of Rs 49,677 crore. The impact of higher credit offtake is visible in the decline in the overall holdings of government securities by commercial banks. Their holdings are currently at 31 per cent of their liabilities compared to 36 per cent a year ago and about 42 per cent two years ago.

Growth momentum maintained

The RBI said that industrial production in April and May 2006 grew at 9.8 per cent driven by the manufacturing sector (chemicals, machinery, basic metal, transport equipment etc.) The capital goods sector grew at 21 per cent, the report said.

The report said that service sector growth was also robust, adding that services now constitute more than 60 per cent of GDP. Lead indicators of service sector performance (such as tourist arrivals, commercial vehicle production, railway freight traffic, new cell phone connections) showed strong growth.

The report said that the RBI's Industrial Outlook Survey shows confidence in the improvement of the overall business situation for the current quarter. The report said that buoyancy in manufacturing and service sector activities combined with positive business confidence and expectations suggest that the growth momentum (GDP growth projections of 7.5 per cent- 8 per cent) would be maintained.