Headline and core inflation remained at elevated levels
in many economies during the first half of 2006-07 reflecting high commodity prices
and strong demand conditions. Although headline inflation eased somewhat from
August 2006 levels in tandem with the softening of international crude oil prices
and favourable base effects, it remains above the inflation targets/comfort zones
in many economies. Many central banks continued with pre-emptive monetary tightening
to mitigate the second round effects, especially in the face of continuing strong
demand. Amongst advanced economies, the European Central Bank (ECB), the Bank
of England, the Reserve Bank of Australia and the Bank of Japan raised their policy
rates during 2006-07. The US Fed, however, has left its rate unchanged since end-June
2006 in view of some slowing down of economic activity. Amongst emerging economies,
central banks such as the South African Reserve Bank, the People's Bank of China,
the Bank of Korea and the Central Bank of the Republic of Turkey raised their
policy rates during 2006-07. Central banks in emerging market economies such as
Korea, China and Russia also raised cash reserve requirements to address concerns
regarding excess liquidity arising, particularly from large external flows. Some
other central banks such as the Bank of Thailand and the Bank of Israel changed
direction over the course of the year - raising rates initially and then cutting
them to support growth. In India, prices of primary food articles and
manufactured products exerted upward pressures on headline inflation in 2006-07.
Wholesale price inflation was generally within the Reserve Bank's indicative projections
of 5.0-5.5 per cent up to mid-November 2006 and rose above the upper end of the
band thereafter. The year-on-year (y-o-y) inflation was 5.7 per cent as on March
31, 2007 as compared with 4.0 per cent a year ago. Measures of consumer price
inflation remained above the WPI inflation throughout the year, mainly reflecting
the impact of higher food prices. The Reserve Bank continued with the policy of
gradual withdrawal of monetary accommodation, using various instruments at its
disposal flexibly to stabilise inflationary expectations, while continuing to
pursue the medium term goal of a ceiling on inflation at 5.0 per cent. The Government
also took fiscal and supply-side measures to contain inflation. Global
Inflation Headline inflation in major advanced economies remained
firm till August 2006 in tandem with crude oil prices reaching record highs. It
eased during September-October 2006 on the back of base effects as well as the
sharp decline in international crude oil prices but again rose during December
2006-March 2007 (Chart 21). Consumer price inflation in
the OECD countries rose from 2.5 per cent

in
March 2006 to a peak of 3.1 per cent in June 2006 before moderating to 2.1 per
cent in February 2007. Amongst major economies, headline inflation in the US rose
from 3.4 per cent in March 2006 to 4.3 per cent in June 2006. Although it has
since moderated to 2.8 per cent in March 2007, it remains at elevated levels.
In the UK, CPI inflation increased to 3.1 per cent in March 2007 from 1.8 per
cent a year ago. In the euro area, inflation remained above the target of 'below
but close to 2.0 per cent' till August 2006, and moderated thereafter to 1.9 per
cent in March 2007. Notwithstanding some moderation in headline inflation, core
inflation still remains firm in major economies. CPI inflation (excluding food
and energy) was 2.5 per cent in the US in March 2007 (2.1 per cent a year ago)
and 2.1 per cent in the OECD countries in February 2007 (1.6 per cent a year ago).
Many central banks have, therefore, continued to tighten monetary policies in
order to contain inflation and inflationary expectations, especially in view of
continued strength of demand and possible stronger pass-through of past increases
in oil prices. After having raised its target federal funds rate by 425
basis points since the tightening began in June 2004, the US Fed has paused at
each of the meetings held since end-June 2006 (Chart 22).
Economic growth moderated in the second half of 2006, partly reflecting a cooling
of the housing market. Core inflation remains at elevated level. The Federal Open
Market Committee in its latest meeting held on March 21, 2007 noted that the risk
that inflation will fail to moderate as expected remains the predominant policy
concern. It indicated that future policy adjustments will depend on the evolution
of the outlook for both inflation and economic growth, as implied by incoming
information. In the euro area, notwithstanding some easing in inflation since
August 2006, risks to the price outlook are seen on the upside due to the possibility
of 
further
oil price rises, additional increases in administered prices and indirect taxes
and stronger than currently expected wage developments. The European Central Bank
(ECB), therefore, raised the key policy rate by 25 basis points each on five occasions
during 2006-07 (June 2006, August 2006, October 2006, December 2006 and March
2007). The policy rate has been increased by 175 basis points since the tightening
began in December 2005 (Table 30). Given the favourable economic
environment, the ECB is of the view that monetary policy continues to be on the
accommodative side, with the key interest rates moderate, money and credit growth
vigorous, and liquidity in the euro area ample by all plausible measures.
In view of strong economic activity, limited spare capacity, rapid growth
of broad money and credit, rise in asset prices and expectations about inflation
remaining above the target in the near term, the Bank of England raised its policy
rate by 25 basis points each in August 2006, November 2006 and January 2007 to
5.25 per cent. The Bank of Japan (BoJ), after maintaining zero interest rates
for an extended period, raised the uncollateralised overnight call rate (the operating
target of monetary policy since March 2006) by 25 basis points each on two occasions
- July 2006 and February 2007 - during the year to 0.50 per cent. The BoJ believes
that monetary environment still remains very accommodative. With regard to the
future course of monetary policy, the Bank of Japan has stated that it will adjust
the level of interest rates gradually in the light of developments in economic
activity and prices, while maintaining the accommodative financial conditions
ensuing from very low interest rates for some time. Amongst other major advanced
economies, central banks in Australia, Norway and New Zealand raised their policy
rates during 2006-07.
Table
30: Global Inflation Indicators | (Per
cent) | Country/ Region | Key
Policy Rate | Policy Rates
(As
on April 18, 2007) | Changes
in Policy Rates (basis points) | CPI
Inflation (y-o-y) | Growth
(y-o-y) | Since end- March 2005 | Since
end- March2006 | 2006 (Mar.) | 2007
(Mar.) | 2005 (Q4) | 2006
(Q4) | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 |
Developed Economies | | | | | | | |
Australia | Cash
Rate | 6.25 (Nov. 8, 2006) | 75 | 75 | 2.8 | 3.3
$ | 2.7 | 2.8 |
Canada | Overnight
Rate | 4.25 (May 24, 2006) | 175 | 50 | 2.2 | 2.0
* | 2.9 | 2.3 |
Euro area | Interest
Rate on | | | | | | | |
| Main
Refinancing | | | | | | | |
| Operations | 3.75
(Mar. 8, 2007) | 175 | 125 | 2.2 | 1.9 | 1.7 | 3.3 |
Japan | Uncollateralised | | | | | | | |
| Overnight
Call Rate | 0.50 (Feb. 21,
2007) | ** | 50 | -0.1 | -0.2
* | 4.0 | 2.3 |
UK | Official
Bank Rate | 5.25 (Jan. 11,
2007) | 50 | 75 | 1.8 | 3.1 | 1.8 | 3.0 |
US | Federal
Funds Rate | 5.25 (June 29,
2006) | 250 | 50 | 3.4 | 2.8 | 3.2 | 3.1 |
Developing Economies
| Brazil | Selic
Rate | 12.50 (Apr. 18, 2007) | (-)675 | (-)400 | 5.3 | 3.0 | 1.4 | 3.8 |
India | Reverse
Repo Rate | 6.00 (July 25,
2006) | 125 | 50 | 4.9 | 7.6
* | 9.3 | 8.6 |
| Repo
Rate | 7.75 (Mar. 30, 2007) | 175 | 150 | | | | |
| | | (150) | (150) | | | | |
China | Benchmark
1-year | 6.39 (Mar. 18, 2007) | 81 | 81 | 0.8 | 3.3 | 10.4 | 11.1
£ | | Lending
Rate | | (300) | (300) | | | | |
Indonesia | BI
Rate | 9.00 (Mar. 6, 2007) | 50
@ | (-)375 | 15.8 | 6.5 | 4.9 | 6.1 |
Israel | Key
Rate | 4.00 (Feb. 26, 2007) | 50 | (-)75 | 3.1 | 0.8
* | 4.8 | 3.7 |
Korea | Overnight
Call Rate | 4.50 (Aug. 10,
2006) | 125 | 50 | 2.0 | 2.2 | 5.3 | 4.0 |
| | | (80) | (80) | | | | |
Philippines | Reverse
Repo Rate | 7.50 (Oct. 20,
2005) | 75 | 0 | 7.6 | 2.2 | 6.1 | 6.5 |
Russia | Refinancing
Rate | 10.50 (Jan. 29, 2007) | -250 | -150 | 10.6 | 7.1 | 7.0 | 7.7 |
| | | (150) | (150) | | | | |
South Africa | Repo
Rate | 9.00 (Dec. 8, 2006) | 150 | 200 | 3.9 | 5.7
* | 4.5 | 6.1 |
Thailand | 14-day
Repurchase Rate | 5.00 (June
7, 2006) | 275 | 50 | 5.7 | 2.0 | 4.7 | 4.2 |
| 1-day
Repurchase Rate | 4.00 (Apr.
11, 2007) | – | (-)94^ | | | | |
@: Change since July 2005 when
Bank Indonesia adopted BI rate as the reference rate with the
formal adoption
of inflation targeting. *: February 2007. $
: Q4 of 2006.
£ : Q1 of 2007. **: The Bank of Japan decided on March 9, 2006 to change
the operating target of money market operations from the outstanding balance of
current accounts at the Bank to the uncollateralised overnight call rate.
^: Change over January 16, 2007. Effective January 17, 2007, the 1-day repurchase
rate replaced the 14-day repurchase rate as the policy rate. Note
: 1. For India, data on inflation pertain to CPI for Industrial Workers.
2. Figures in parentheses in column (3) give the date when the policy rates were
last revised. 3. Figures in parentheses in columns (4) and (5) give the variation
in cash reserve ratios during the period. Source: International
Monetary Fund, websites of respective central banks and the Economist. |
Inflation remains relatively modest in several economies in Asia, reflecting
both pre-emptive monetary tightening as well as appreciation of the exchange rates.
Consumer price inflation in China increased to 3.3 per cent in March 2007 from
0.8 per cent a year ago, partly on the back of higher food prices (Chart
23). Real GDP growth accelerated to 10.7 per cent in 2006 from 10.4 per cent
in the previous year. Growth in fixed investment decelerated in 2006, but still
remains 
large.
The economic activity has remained buoyant in 2007 so far. Real GDP growth accelerated
to 11.1 per cent during the first quarter of 2007 from 10.4 per cent a year ago.
Owing to persistent BOP surplus, excess liquidity has built up in the banking
sector, and loan expansion remains fairly large. In view of strong growth in money
supply and credit, the People's Bank of China (PBC) increased the benchmark 1-year
lending rate by 27 basis points each in April 2006, August 2006 and March 2007.
Apart from continued issuances of its own bills to mop up liquidity, the PBC has
also raised the cash reserve ratio by 300 basis points since July 2006 in six
steps (50 basis points each effective July 5, 2006, August 15, 2006, November
15, 2006, January 15, 2007, February 25, 2007 and April 16, 2007) to 10.50 per
cent. The monetary measures were supported by a series of industrial structure
adjustments and trade policies - such as terminating/lowering the export tax rebate
for non-ferrous metals and scraps - to curb the export of high energy-consuming
and high-polluting sectors and resources. In response to a sharp rise in foreign
investment in the real estate sector and the purchase of housing by overseas institutions
and individuals, measures were taken by the authorities in July 2006 to regulate
foreign investment in China's real estate market. In Korea, real GDP
growth moderated to 4.0 per cent in the quarter ended December 2006 from 5.3 per
cent a year ago. Consumer price inflation and core inflation both remain stable.
The Bank of Korea has, therefore, kept its policy rate unchanged at 4.5 per cent
since August 2006 (after having raised the rates by 125 basis points since the
tightening began in October 2005). However, in view of sharp growth in monetary
and credit aggregates, and financial institutions' liquidity, led by inflows of
foreign funds, the Bank of Korea increased the cash reserve ratio on demand deposits
and money market deposit accounts from 5.0 per cent to 7.0 per cent, effective
December 23, 2006. The reserve requirement on time deposits, various instalment
deposits and certificates of deposits was kept unchanged at 2.0 per cent, while
long-term time and savings deposits were exempted from the existing 1.0 per cent
requirement. Following this adjustment, the average reserve requirement ratio
rose from 3.0 per cent to 3.8 per cent. In response to these measures, the Bank
of Korea expects that the pace of liquidity expansion will slow and the short-term
bias of financial institutions' deposit structures will lessen. In Thailand,
real GDP growth was 4.2 per cent in the quarter ended December 2006 as compared
with 4.7 per cent a year ago. In the first quarter of 2007, domestic demand slowed
down led by private consumption and investment. Inflationary pressures are expected
to moderate. Therefore, the Bank of Thailand has since January 17, 2007 lowered
the 1-day repurchase rate (which replaced the 14-day repurchase rate as the policy
rate) by 94 basis points to 4.00 per cent on April 11, 2007. The Bank of Thailand
had earlier raised the policy rate by 275 basis points between June 2005 and June
2006. In order to discourage speculative short-term capital flows and to help
maintain stability in the Thai baht with the objective of sustaining long-run
growth in the Thai economy, the Bank of Thailand (BoT) on December 18, 2006 decided
to impose unremunerated reserve requirement (URR) of 30 per cent on short-term
capital flows. However, on December 19, 2006, the BoT exempted investments in
stock markets from the URR. In Indonesia, economic activity gradually
regained momentum during 2006, driven primarily by rapidly expanding exports and
also by domestic consumption. Inflation, which had reached 18.4 per cent in November
2005, eased sharply to 6.5 per cent in March 2007 reflecting monetary policy actions
as well as the easing of oil prices and the base effect. Bank Indonesia has, therefore,
cut its policy rate by 375 basis points since May 2006 to 9.00 per cent in March
2007 to support growth. The policy rate was earlier raised by 425 basis
points during July-December 2005 to contain inflation. Amongst other
emerging economies, the South African Reserve Bank raised the policy rate by 200
basis points - 50 basis points each in June, August, October and December 2006
- to 9.0 per cent to contain inflationary pressures emanating from volatility
in oil prices and from food and services prices. Turkey has kept rates unchanged
since August 2006 on the back of slowdown in domestic demand and moderation in
inflation expectations. Turkey had earlier increased its policy rate by 425 basis
points during June-July 2006 on concerns over the possible pass-through effect
of the exchange rate movements arising from the volatility in international financial
markets. On the other hand, in view of weak economic activity, Brazil has reduced
policy rates by 725 basis points since September 2005 to 12.50 per cent on April
18, 2007. The Bank of Israel has cut its policy rate by 150 basis points since
October 2006 (25 basis points each in October and November 2006, 50 basis points
in December 2006, 25 basis points each in January 2007 and February 2007) to 4.00
per cent to support growth, after having raised rates by 200 basis points
between September 2005 and August 2006. In Russia, consumer price inflation remains
high, although it eased somewhat to 7.1 per cent in March 2007 from 10.6 per cent
a year ago. Money supply (M2) growth accelerated to 50.4 per cent, year-on-year,
as on March 1, 2007 from 37.3 per cent a year ago. The Bank of Russia raised the
required reserve ratio on credit institutions' liabilities to non-resident banks
in rubles and foreign currency from 2.0 per cent to 3.5 per cent on October 31,
2006. It has, however, reduced the refinancing rate by 150 basis points - 50 basis
points each on three occasions - from 12.0 per cent in December 2005 to 10.5 per
cent in January 2007. Global Commodity Prices
Non-fuel commodity prices firmed up during 2006-07 led by metals and food prices.
Crude oil prices rose sharply in the first four months of 2006-07 to reach a record
high but witnessed a sharp correction thereafter; on a year-on-year basis, prices
were broadly unchanged in March 2007. Metals prices recorded large gains, especially
during April 2006 up to mid-May 2006, on the back of robust demand in emerging
economies, especially China. Food prices, led by wheat and edible oil, rose reflecting
a shortfall in global production (Chart 24). International
crude oil prices (WTI) exhibited large intra-year volatility during 2006-07. Prices
initially firmed up to reach a record high of US $ 78.4 a barrel on July 14, 2006
on concerns over Iran's nuclear programme and unrest in Nigeria, amidst limited
spare capacity. Subsequently, prices eased to below US $ 60 a barrel during October-November
2006 on the back of signs of slowdown of the US economy, increased US stocks and
easing of tension over Iran's nuclear programme (Table 31,
Table 32). Prices edged up to around US $ 62-63 a barrel
in December 2006 on 
Table
31: International Crude Oil Prices | (US
dollars per barrel) | Year/Month | Dubai
Crude | UK Brent | US
WTI | Average Crude Price | Indian
Basket Price | 1 | 2 | 3 | 4 | 5 | 6 |
2001-02 | 21.8 | 23.2 | 24.1 | 23.0 | 22.4 |
2002-03 | 25.9 | 27.6 | 29.2 | 27.6 | 26.6 |
2003-04 | 26.9 | 29.0 | 31.4 | 29.1 | 27.8 |
2004-05 | 36.4 | 42.2 | 45.0 | 41.3 | 38.9 |
2005-06 | 53.4 | 58.0 | 59.9 | 57.1 | 55.4 |
2006-07 | 60.9 | 64.4 | 64.7 | 63.3 | 62.4 |
March 2004 | 30.5 | 33.8 | 36.7 | 33.7 | 31.9 |
March 2005 | 45.6 | 53.1 | 54.2 | 50.9 | 48.8 |
March 2006 | 57.7 | 62.3 | 62.9 | 60.9 | 59.6 |
April 2006 | 64.1 | 70.4 | 69.5 | 68.0 | 66.8 |
May 2006 | 64.9 | 70.2 | 70.9 | 68.6 | 67.2 |
June 2006 | 65.1 | 68.9 | 70.9 | 68.3 | 66.7 |
July 2006 | 69.1 | 73.9 | 74.4 | 72.5 | 71.1 |
August 2006 | 68.8 | 73.6 | 73.0 | 71.8 | 70.9 |
September 2006 | 59.8 | 62.8 | 63.8 | 62.0 | 61.1 |
October 2006 | 56.5 | 58.4 | 58.9 | 58.0 | 57.3 |
November 2006 | 56.8 | 58.5 | 59.1 | 58.1 | 57.5 |
December 2006 | 58.7 | 62.3 | 62.0 | 61.0 | 60.2 |
January 2007 | 52.0 | 54.3 | 54.2 | 53.5 | 53.0 |
February 2007 | 55.7 | 57.8 | 59.3 | 57.6 | 56.6 |
March 2007 | 59.1 | 62.1 | 60.6 | 60.6 | 60.4 |
Source : International Monetary
Fund and the World Bank. | the back of fall in US product
inventories and production cuts by the Organisation of the Petroleum Exporting
Countries (OPEC). The OPEC reduced crude oil production by 1.2 million barrels
per day (mb/d) effective November 1, 2006 to balance supply and demand to support
prices. Nonetheless, prices eased further to US $ 51 a barrel in January 2007
mainly on account of mild winter in the US and rise in the US stocks. Prices,
however, rebounded in the last week of January 2007 and reached US $ 60 a barrel
in February 2007 on the back of renewed winter demand and the second production
cut of 0.5 mb/d by OPEC, effective February 1, 2007. Prices rose further
to around US $ 67 in late March 2007 on tensions over Iran's detention of British
naval personnel. Prices eased to US $ 64 a barrel by April 5, 2007 on the release
of the British naval personnel. Metals prices remained firm during 2006-07
on the back of robust demand and supply constraints amidst speculative investor
interest. After witnessing a steady rise since late 2004 and, in particular, sharp
rise during April 2006 and early May 2006, global metal prices witnessed sharp
correction in mid-May 2006 on fears that further tightening by the US might slow
down demand for metals. Prices have since then been largely range-bound, with
intermittent episodes of corrections reflecting incoming information on global
growth prospects. Some metals such as lead, nickel and tin registered large
gains during 2006-07. Prices of aluminium, copper, tin and zinc during March 2007
were higher by about 14
Table
32: World Supply-Demand Balance of Oil | (Million
barrels per day) | Item | 2003 | 2004 | 2005 | 2006 | 2007
(P) | 2008
(P) | 2007 P |
Q1 | Q2 | Q3 | Q4 |
1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 | 10 | 11 |
Demand |
1. | OECD | 48.7 | 49.5 | 49.6 | 49.1 | 49.6 | 49.9 | 50.4 | 48.2 | 49.3 | 50.5 |
2. | Non-OECD | 31.2 | 33.0 | 34.4 | 35.4 | 36.5 | 37.8 | 35.9 | 36.0 | 36.5 | 37.5 |
| of
which: China | 5.6 | 6.5 | 6.9 | 7.3 | 7.7 | 8.2 | 7.4 | 7.7 | 7.7 | 8.0 |
3. | Total
(1+2) | 79.9 | 82.5 | 84.0 | 84.6 | 86.1 | 87.7 | 86.3 | 84.2 | 85.8 | 88.0 |
Supply |
4. | Non-OPEC | 48.9 | 50.1 | 50.3 | 49.3 | 50.0 | 50.8 | 49.6 | 49.7 | 50.1 | 50.5 |
5. | OPEC | 30.7 | 32.9 | 34.2 | 35.2 | 35.4 | 36.9 | 34.6 | 34.9 | 36.0 | 36.2 |
6. | Total
(4+5) | 79.6 | 83.1 | 84.5 | 84.5 | 85.4 | 87.6 | 84.2 | 84.6 | 86.1 | 86.7 |
Stock Changes | 0.3 | -0.6 | -0.5 | 0.1 | 0.7 | 0.0 | 2.1 | -0.3 | -0.4 | 1.2 |
P: Projections. Source
: US Energy Information Administration. | per
cent, 26 per cent, 75 per cent and 35 per cent, respectively, over their levels
a year ago while nickel prices nearly trebled. International steel prices declined
during the year (Table 33).
Table
33: International Commodity Prices | Commodity | Unit | 2004 | Index | Variation
(per cent)
(Mar. 2007
over Mar.
2006) | 2004 | 2005 | 2006 | 2006-07 | 2007 March | | Apr.-
Jun. | Jul.- Sept. | Oct.-
Dec. | Jan.- Mar. | | |
1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 | 10 | 11 | 12 |
Energy |
Coal | | $/mt | 53.0 | 100.0 | 89.8 | 92.6 | 99.2 | 94.9 | 87.9 | 100.2 | 104.2 | 11.0 |
Crude oil (Average) | | $/bbl | 37.7 | 100.0 | 141.6 | 170.6 | 181.2 | 182.5 | 156.5 | 151.7 | 160.7 | -0.5 |
Non-Energy Commodities | | | | | | | | | | | |
Palm oil | | $/mt | 471.3 | 100.0 | 89.6 | 101.5 | 93.1 | 104.5 | 115.8 | 129.2 | 132.0 | 41.4 |
Soybean oil | | $/mt | 616.0 | 100.0 | 88.5 | 97.2 | 93.6 | 100.7 | 107.5 | 115.2 | 116.6 | 33.2 |
Soybeans | | $/mt | 306.5 | 100.0 | 89.6 | 87.6 | 86.0 | 86.1 | 94.6 | 103.7 | 105.1 | 25.8 |
Rice | | $/mt | 237.7 | 100.0 | 120.4 | 128.3 | 129.4 | 131.4 | 126.5 | 133.3 | 135.7 | 6.3 |
Wheat | | $/mt | 156.9 | 100.0 | 97.1 | 122.4 | 120.8 | 125.0 | 133.0 | 126.4 | 126.9 | 14.2 |
Sugar | | c/kg | 15.8 | 100.0 | 138.0 | 206.3 | 231.0 | 193.7 | 162.7 | 148.7 | 145.6 | -39.7 |
Cotton A Index | | c/kg | 136.6 | 100.0 | 89.1 | 92.8 | 89.2 | 93.7 | 93.6 | 94.4 | 94.4 | -0.3 |
Aluminium | | $/mt | 1716.0 | 100.0 | 110.6 | 149.8 | 154.6 | 144.6 | 158.7 | 163.2 | 161.0 | 13.7 |
Copper | | $/mt | 2866.0 | 100.0 | 128.4 | 234.5 | 251.6 | 267.6 | 246.6 | 207.0 | 225.1 | 26.4 |
Gold | | $/toz | 409.2 | 100.0 | 108.7 | 147.7 | 153.3 | 151.9 | 150.2 | 158.9 | 160.0 | 17.6 |
Silver | | c/toz | 669.0 | 100.0 | 109.7 | 172.9 | 183.3 | 174.7 | 188.8 | 199.1 | 196.7 | 26.8 |
Steel cold-rolled coil/sheet | $/mt | 607.1 | 100.0 | 120.8 | 114.3 | 109.8 | 115.3 | 108.4 | 107.1 | 107.1 | -13.3 |
Steel hot-rolled coil/sheet | $/mt | 502.5 | 100.0 | 126.0 | 119.4 | 117.8 | 119.4 | 111.1 | 109.5 | 109.5 | -15.4 |
Tin | | c/kg | 851.3 | 100.0 | 86.7 | 103.1 | 100.2 | 101.6 | 121.4 | 149.5 | 163.2 | 75.0 |
Zinc | | c/kg | 104.8 | 100.0 | 131.8 | 312.5 | 314.1 | 320.9 | 401.1 | 329.8 | 312.1 | 35.3 |
$ : US dollar.
c : US cent. bbl : barrel. mt : metric tonne.
kg : Kilogram. toz: troy oz. Source : Based
on World Bank's actual commodity price data. The year 2004 has been taken as the
base to better exhibit price trends over the relevant period. | 
Food
prices firmed up led by wheat and edible oils on reports of shortfalls in production
and increased demand for non-food uses. According to the latest assessment by
the Food and Agriculture Organisation (FAO)/US Department of Agriculture (USDA),
global wheat production is expected to decline by 4.4 per cent in 2006-07 on the
back of hot and dry weather/drought affecting crops in Australia, Argentina and
Brazil. As a result, wheat stocks are expected to fall by about 18 per cent to
121 million tonnes by the end of 2006-07 season. At this level, the stocks of
wheat will be the lowest since 1981-82 (112.5 million tonnes) (Chart
25). In view of these developments, wheat prices have firmed up since the
second half of 2005. After some easing between November 2006 and January 2007,
wheat prices again firmed up in February 2007. Prices in March 2007 were higher
by about 14 per cent on a year-on-year basis (Chart 26).
Rice production is also expected to decline during 2006-07, albeit marginally
(by 0.4 per cent) resulting in a drawdown of stocks by 0.6 per cent. After showing
signs of softness during October-November 2006, rice prices again firmed up from
December 2006. Prices in March 2007 were higher by about 6 per cent on a year-on-year
basis. Prices of oilseeds and edible oils edged up sharply in the second half
of 2006-07, inter alia, due to lower production coupled with strong demand
for non-food uses such as fuels and as feedstock for bio-diesel production. On
a year-on-year basis, soybean, soybean oil and palm oil prices in March 2007 were
higher by 26 per cent, 33 per cent and 41 per cent, respectively. International
sugar prices, which had increased sharply in early 2006, eased significantly from
August 2006 on forecasts of higher global production during 2006-07. Sugar prices
have declined by almost 42 per cent by March
2007 from the recent peak touched in February 2006. According to the
International Sugar Organisation, global sugar production is estimated to increase
by 7.5 million tonnes to 160 million tonnes during 2006-07 (October-September)
season, exceeding global consumption by 7.2 million tonnes. A record crop in Brazil,
the world's largest producer, significant growth in output in the Far East along
with likely higher production in India is expected to more than offset the contraction
in the EU output. Global cotton prices were largely range-bound during 2006-07.
Futures markets suggest that international crude oil and food prices could firm
up further in the coming months. Metals prices are expected to remain at around
current levels in the near term but could ease over the next year (Table
34).
Table
34: International Commodity Prices – Futures Market |
Commodity | Unit | April/May
2007 | July 2007 | July
2008 | 1 | 2 | 3 | 4 | 5 |
Crude oil | $/bbl | 63.1 | 65.7 | 69.8 |
Soybean oil | cents/pound | 31.1 | 31.7 | 33.8* |
Soybeans | cents/bushels | 715 | 732 | 791 |
Rice | cents/cwt | 1,011 | 1,051 | 1,158# |
Wheat | cents/bushels | 474 | 489 | 493 |
Aluminium | $/mt | 2,836 | 2,880 | 2,703 |
Copper | $/mt | 8,053 | 7,970 | 7,200 |
Tin | c/kg | 14,400 | 14,200 | 13,325 |
Zinc | c/kg | 3,685 | 3,698 | 3,378 |
# : March 2008.
* : May 2008. Source : Chicago Board of Trade, London Metals
Exchange and NYMEX. |
Inflation Conditions in India
Monetary policy during 2006-07 was conducted to manage the transition to
a higher growth path while ensuring that pressures on actual inflation and inflation
expectations are contained. Taking into account the impact of real, monetary and
global factors on domestic prices, the Reserve Bank in its Annual Policy Statement
for 2006-07 (April 2006) noted that containing inflationary expectations would
continue to pose a challenge to monetary management and the policy endeavour would
be to contain the year-on-year inflation rate for 2006-07 in the range of 5.0-5.5
per cent. Against the backdrop of widespread and simultaneous monetary policy
tightening by several countries in early June 2006 following marked and heightened
volatility in the international financial markets, and in the light of the prevailing
domestic monetary and credit environment, the LAF reverse repo and repo rates
were increased by 25 basis points each to 5.75 per cent and 6.75 per cent, respectively,
effective June 9, 2006. In its First Quarter Review of the Annual Statement on
Monetary Policy (July 2006), the Reserve Bank observed that containing inflation
in the range of 5.0-5.5 per cent warranted appropriate priority in policy responses.
Accordingly, the Reserve Bank raised the reverse repo rate and the repo rate by
25 basis points each to 6.00 per cent and 7.00 per cent, respectively, on July
25, 2006. The Bank Rate and cash reserve ratio were left unchanged. In
the Mid-Term Review of Annual Policy Statement for 2006-07 (October 2006),
it was observed that the combination of high growth and consumer inflation coupled
with escalating asset prices and tightening infrastructural bottlenecks underscored
the need to reckon with dangers of overheating and the implications for the timing
and direction of monetary policy setting. The Mid-term Review further noted that
although there was no conclusive evidence of potential overheating in the Indian
economy at that time, the criticality of monitoring all available indications
that could point to excess aggregate demand was perhaps more relevant. In the
Mid-term Review, the repo rate was increased by 25 basis points to 7.25 per cent,
while keeping the reverse repo rate unchanged at 6.00 per cent (Table
35). In the Third Quarter Review (January 2007), the
Reserve Bank observed that early warning signals emanating from rising inflation
in an environment of high money and credit growth ( Chart 27)
indicated that monetary policy was accommodative, warranting a policy response.
Accordingly, the repo rate was increased by 25 basis points to 7.50 per cent while
keeping the reverse repo rate unchanged at 6.0 per cent. It was also decided to
reduce the interest rate ceilings on NR(E)RA and FCNR(B) deposits by 50 basis
points and 25 basis points, respectively.
Table
35: Movement in Key Policy Rates and Inflation | (Per
cent) | Effective since | Reverse
Repo Rate | Repo
Rate | Cash
Reserve Ratio | WPI
Inflation | 1 | 2 | 3 | | 4 | 5 |
March 31, 2004 | 4.50 | 6.00 | | 4.50 | 4.6 |
September 18, 2004 | 4.50 | 6.00 | | 4.75
(+0.25) | 7.9 | October
2, 2004 | 4.50 | 6.00 | | 5.00
(+0.25) | 7.1 | October
27, 2004 | 4.75 (+0.25) | 6.00 | | 5.00 | 7.4 |
April 29, 2005 | 5.00
(+0.25) | 6.00 | | 5.00 | 6.0 |
October 26, 2005 | 5.25
(+0.25) | 6.25 | (+0.25) | 5.00 | 4.5 |
January 24, 2006 | 5.50
(+0.25) | 6.50 | (+0.25) | 5.00 | 4.2 |
June 9, 2006 | 5.75
(+0.25) | 6.75 | (+0.25) | 5.00 | 4.9 |
July 25, 2006 | 6.00
(+0.25) | 7.00 | (+0.25) | 5.00 | 4.7 |
October 31, 2006 | 6.00 | 7.25 | (+0.25) | 5.00 | 5.3 |
December 23, 2006 | 6.00 | 7.25 | | 5.25
(+0.25) | 5.5 | January
6, 2007 | 6.00 | 7.25 | | 5.50
(+0.25) | 6.1 |
January
31, 2007 |
6.00 |
7.50 |
(+0.25) |
5.50 |
6.1 |
February 17, 2007 | 6.00 | 7.50 | | 5.75
(+0.25) | 6.7 | March
3, 2007 | 6.00 | 7.50 | | 6.00
(+0.25) | 6.5 | March
30, 2007 | 6.00 | 7.75 | (+0.25) | 6.00 | 6.5 |
April 14, 2007 | 6.00 | 7.75 | | 6.25
(+0.25)* | | *
: As announced on March 30, 2007, CRR will be hiked by further 25 basis points
effective
the fortnight
beginning April 28, 2007.
Note :
1.
With effect from October 29, 2004, the nomenclature of repo and reverse repo was
changed
in keeping with
international usage. Now, reverse repo indicates absorption
of liquidity and
repo signifies injection of liquidity.
Prior to October 29, 2004,
repo indicated absorption of
liquidity while reverse repo meant injection of liquidity.
The nomenclature in this Report is
based on the new usage of terms
even for the period prior to October 29, 2004.
2. Figures in parentheses indicate
change in policy rates. |
In order to reinforce the measures
already taken for maintaining price stability and anchoring inflation expectations
to sustain the growth momentum, 
the
Reserve Bank, on March 30, 2007 announced a further hike of 25 basis points in
the repo rate to 7.75 per cent, while leaving the reverse repo rate unchanged.
It also decided to increase the CRR by another 50 basis points in two stages of
25 basis points each effective April 14, 2007 and April 28, 2007 - a cumulative
increase of 150 basis points from December 2006 (see Chapter III). The Reserve
Bank emphasised that the conduct of monetary policy would continue to demonstrate
that inflation beyond its tolerance threshold was unacceptable and that the resolve
to ensure price stability was always backed by timely and appropriate policy responses.
An assessment of key macroeconomic indicators in select EMEs indicates that over
the past year, consumer price inflation has eased in a number of economies such
as Brazil, Indonesia, Israel, the Philippines, Russia and Thailand. It, however,
rose in China, India and South Africa. Major EMEs, except India and South Africa,
have recorded surplus in current accounts. Although the Centre's fiscal deficit
in India declined during 2006-07, it remained higher than most EMEs. The real
policy rate in India in March 2007 was marginally lower than a year ago and remained
below that in major EMEs (Table 36).
Table
36: Key Macroeconomic Indicators: Emerging Markets |
(Per cent) |
Country | Consumer
Price Inflation | Current
Account
Balance
(per cent to GDP) | Central
Govt.
Fiscal Balance
(per cent of GDP) | Real
Policy
Rate | Real
GDP
Growth | March
2006 | March
2007 | 2005 | 2006 | 2005 | 2006 | March
2006 | March
2007 | 2005 | 2006 |
1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 | 10 | 11 |
Brazil | 5.3 | 3.0 | 1.6 | 1.3 | -3.4 | -3.2 | 11.2 | 9.8 | 2.9 | 3.7 |
China | 0.8 | 3.3 | 7.2 | 9.1 | -1.3 | -0.7 | 4.8 | 3.1 | 10.4 | 10.7 |
India | 4.9
* | 7.6 * | -1.2
@ | – | -4.1
@ | -3.7 # | 1.6 | 0.2 | 9.0
@ | 9.2 # |
| (4.1) | (5.7) | (-6.5) | | | | (2.4) | (2.0) | | |
Indonesia | 15.8 | 6.5 | 0.1 | 2.7 | -0.5 | -1.0 | -3.0 | 2.5 | 5.7 | 5.5 |
Israel | 3.1
* | -0.8 * | 2.9 | 5.2 | -2.9 | -2.7 | 1.2 | 4.8 | 5.2 | 5.1 |
Korea | 2.0 | 2.2 | 1.9 | 0.7 | 1.9 | 1.8 | 2.0 | 2.3 | 4.2 | 5.0 |
Philippines | 7.6 | 2.2 | 2.0 | 2.9 | -2.7 | -1.0 | -0.1 | 5.3 | 5.0 | 5.4 |
Russia | 10.6 | 7.1 | 10.9 | 9.8 | 7.5 | 7.5 | 1.4 | 3.4 | 6.4 | 6.7 |
South Africa | 3.9
* | 5.7 * | -3.8 | -6.4 | – | – | 3.6 | 3.3 | 5.1 | 5.0 |
Thailand | 5.7 | 2.0 | -4.5 | 1.6 | 0.2 | 0.1 | -1.2 | 2.5 | 4.5 | 5.0 |
* : February. @ : Data pertain
to fiscal year 2005-06. # : Data pertain to fiscal year 2006-07. Note
: 1.As in Table 30, consumer price inflation data are on a year-on-year
basis.
Data for India are for CPI-Industrial Workers.
2. Real policy rate
is the policy rate less year-on-year consumer price inflation. 3. Figures
in parentheses in columns (2) and (3) refer to wholesale price inflation.
4. Figures in parentheses in column (4) refer to trade balance/GDP ratio.
5. Figures in parentheses in columns (8) and (9) for India are based on wholesale
price inflation. 6. Data on fiscal balance for Korea and Israel pertain to
general government balance. Source : IMF, ADB, official websites
of respective central banks and the Economist. | Wholesale
Price Inflation Inflation movements in 2006-07 were driven by primary
food articles and manufactured products prices reflecting the impact of both supply
side and demand side pressures. The impact of mineral oils, the major driver of
inflation since June 2004, petered out by early September 2006 on the back of
decline in domestic fuel prices and the base effect. Headline inflation, based
on movement in the wholesale price index (WPI), increased to 5.7 per cent, y-o-y,
as on March 31, 2007 from 4.0 per cent a year ago. WPI inflation moved in a range
of 3.7-6.7 per cent during 2006-07 (Chart 28 and Table
37). Headline inflation remained within the Reserve Bank's indicative projection
of 5.0-5.5 per cent up to November 11, 2006 (except one week) and crossed 6.0
per cent between January 6, 2007 and March 24, 2007. The average WPI inflation
rate (average of the 52 weeks) during 2006-07 at 5.4 per cent was higher than
that of 4.4 per cent a year ago. The y-o-y inflation, excluding the fuel group,
at 7.1 per cent was above the headline inflation rate of 5.7 per cent as on March
31, 2007. Among the major groups, prices of primary articles led by wheat,
pulses, milk, oilseeds and raw cotton posed upward pressures on inflation during
2006-07 (Chart 29). Wheat prices remained firm on the back
of low stocks and firm international prices. Domestic wheat stocks were 5.4 million
tonnes as on February 1, 2007 as against the buffer stock norm of 8.2 million
tonnes. Although there was some moderation in early March 2007, wheat prices,
on a year-on-year basis, increased by 7.6 per cent as on March 31, 2007 (global
wheat prices, as noted earlier, increased by about 14 per cent, y-o-y, in March
2007). Prices of pulses also edged higher (12.0 per cent on top of 33.3 per cent
increase a year ago), 
Table
37: Wholesale Price Inflation in India (year-on-year) |
(Per cent) |
Commodity | | April
1, 2006 | March
31, 2007 P | Weight | Inflation | WC | Inflation | WC |
1 | 2 | 3 | 4 | 5 | 6 |
| All
Commodities | 100.0 | 4.0 | 100.0 | 5.7 | 100.0 |
1. | Primary
Articles | 22.0 | 4.8 | 25.8 | 10.7 | 40.4 |
| Food
Articles | 15.4 | 5.9 | 22.5 | 8.3 | 22.3 |
| i. | Rice | 2.4 | 2.1 | 1.1 | 5.7 | 2.1 |
| ii. | Wheat | 1.4 | 12.7 | 4.3 | 7.6 | 1.9 |
| iii. | Pulses | 0.6 | 33.3 | 4.5 | 12.0 | 1.4 |
| iv. | Vegetables | 1.5 | 7.6 | 2.4 | 1.4 | 0.3 |
| v. | Fruits | 1.5 | -3.9 | -1.9 | 5.5 | 1.7 |
| vi. | Milk | 4.4 | 1.9 | 2.0 | 8.4 | 6.0 |
| vii. | Eggs,
Meat and Fish | 2.2 | 13.2 | 7.3 | 11.1 | 4.6 |
| Non-Food
Articles | 6.1 | -2.4 | -3.5 | 16.6 | 15.5 |
| i. | Raw
Cotton | 1.4 | -1.7 | -0.4 | 21.4 | 3.6 |
| ii. | Oilseeds | 2.7 | -9.2 | -5.5 | 30.6 | 11.0 |
| iii. | Sugarcane | 1.3 | 0.7 | 0.3 | 1.1 | 0.3 |
| Minerals | 0.5 | 43.6 | 6.9 | 17.0 | 2.6 |
2. | Fuel,
Power, Light and Lubricants | 14.2 | 8.3 | 45.5 | 1.0 | 4.1 |
| i. | Mineral
Oils | 7.0 | 12.0 | 37.2 | 0.5 | 1.2 |
| ii. | Electricity | 5.5 | 4.5 | 8.3 | 2.3 | 2.9 |
| iii. | Coal
Mining | 1.8 | 0.0 | 0.0 | 0.0 | 0.0 |
3. | Manufactured
Products | 63.8 | 1.9 | 27.7 | 5.8 | 55.9 |
| i. | Food
Products | 11.5 | 1.0 | 2.6 | 6.4 | 11.3 |
| | of
which: Sugar | 3.6 | 6.2 | 4.7 | -12.7 | -6.9 |
| | Edible
Oils | 2.8 | -3.3 | -1.8 | 14.7 | 5.1 |
| ii. | Cotton
Textiles | 4.2 | 2.3 | 2.1 | -1.0 | -0.6 |
| iii. | Man
Made Fibres | 4.4 | -3.9 | -2.1 | 3.7 | 1.3 |
| iv. | Chemicals
and Chemical Products | 11.9 | 3.3 | 9.7 | 2.9 | 5.8 |
| | of
which : Fertilisers | 3.7 | 0.2 | 0.1 | 1.8 | 1.0 |
| v. | Basic
Metals, Alloys and Metal Products | 8.3 | -0.6 | -1.5 | 11.0 | 17.6 |
| | of
which: Iron and Steel | 3.6 | -4.2 | -5.1 | 7.5 | 5.8 |
| vi. | Non-Metallic
Mineral Products | 2.5 | 9.6 | 5.4 | 9.0 | 3.7 |
| | of
which: Cement | 1.7 | 14.9 | 5.6 | 11.6 | 3.3 |
| vii. | Machinery
and Machine Tools | 8.4 | 3.2 | 5.2 | 8.0 | 8.8 |
| | of
which: Electrical Machinery | 5.0 | 4.1 | 3.1 | 12.8 | 6.9 |
| viii. | Transport
Equipment and Parts | 4.3 | 0.9 | 0.8 | 2.1 | 1.2 |
| Memo: | | | | | |
| Food
Items (Composite) | 26.9 | 3.9 | 25.1 | 7.5 | 33.6 |
| WPI
Excluding Food | 73.1 | 4.0 | 74.9 | 5.1 | 66.4 |
| WPI
Excluding Fuel | 85.8 | 2.8 | 54.5 | 7.1 | 95.9 |
P: Provisional. WC: Weighted
Contribution. | reflecting stagnant domestic production
as well as higher demand. Milk prices increased by 8.4 per cent. Prices of oilseeds
witnessed a sharp turnaround - an increase of 30.6 per cent, y-o-y, as against
a decline of 9.2 per cent a year ago -which could be attributed to lower domestic
production as well as firm global prices. Raw cotton prices increased sharply
in March 2007 and prices were 21.4 per cent higher, y-o-y, as on March 31, 2007.
Overall, prices of primary articles, 
on
a y-o-y basis, increased by 10.7 per cent (4.8 per cent a year ago). Primary articles
inflation during 2006-07 was the highest in the past decade (Table
38). In order to contain the price rise in primary commodities, the Government
undertook a number of fiscal and supply measures such as (i) allowing the State
Trading Corporation (STC) to tender overseas for 55 lakh tonnes of wheat to supplement
domestic availability; (ii) permitting private traders to import wheat initially
at 5 per cent duty from June 27, 2006 and subsequently at zero duty from September
9, 2006; (iii) allowing import of pulses at zero duty from June 8, 2006
and a ban on their exports from June 27, 2006; (iv) exempting sugar from customs
duty from June 22, 2006 and a ban on its exports; (v) allowing imports of maize
at zero duty in February 2007; (vi) reduction in customs duty
Table
38: Major Group’s WPI Inflation (year-on-year) |
(Per cent) |
Year | All
Commodities | Primary Articles | Fuel
Group | Manufactured Products |
1 | 2 | 3 | 4 | 5 |
1995-96 | 4.4 | 3.1 | 5.1 | 4.7 |
1996-97 | 5.4 | 9.2 | 13.3 | 2.4 |
1997-98 | 4.5 | 4.6 | 13.7 | 2.3 |
1998-99 | 5.3 | 7.6 | 3.2 | 4.9 |
1999-00 | 6.5 | 4.0 | 26.7 | 2.4 |
2000-01 | 4.9 | -0.4 | 15.0 | 3.8 |
2001-02 | 1.6 | 3.9 | 3.9 | 0.0 |
2002-03 | 6.5 | 6.1 | 10.8 | 5.1 |
2003-04 | 4.6 | 1.6 | 2.5 | 6.7 |
2004-05 | 5.1 | 1.3 | 10.5 | 4.6 |
2005-06 | 4.1 | 5.4 | 8.9 | 1.7 |
2006-07 | 5.7 | 10.7 | 1.0 | 5.8 |
on palm oils by 10 percentage points each in August
2006 and April 2007, and on crude palm oil, sunflower oil and refined sunflower
oil by 10 percentage points each in January 2007. Fuel group inflation
moderated to 1.0 per cent on March 31, 2007 from a peak of 9.9 per cent on June
17, 2006 and 8.3 per cent a year ago, reflecting the base effect as well as cuts
in prices of petrol, diesel and other fuel products. Following the reduction in
international crude oil prices, domestic prices of petrol and diesel were reduced
by Rs. 2 per litre (around 4 per cent) and Re. 1 per litre (around 3 per cent),
respectively, on November 29, 2006 and, by a similar order again effective February
15, 2007. Earlier, in June 2006, the Government had (i) raised domestic petrol
and diesel prices by Rs.4 and Rs.2 per litre, respectively, following the uptrend
in international prices; (ii) reduced customs duty on petrol and diesel to 7.5
per cent from 10.0 per cent; and (iii) announced issuance of oil bonds worth Rs.28,000
crore (over and above Rs.11,500 crore issued during 2005-06) to oil marketing
companies to compensate for their under-recoveries in domestic operations. The
Government issued oil bonds worth Rs. 24,121 crore during 2006-07 in five tranches.
Manufactured products inflation increased to 5.8 per cent as on March 31,
2007 from 1.9 per cent a year ago. Manufactured products inflation during 2006-07
was led by edible oils/oil cakes, metals, cement and electrical machinery. Metals
group inflation was 11.0 per cent, y-o-y, as on March 31, 2007 and contributed
18 per cent to headline inflation. Within the metals group, non-ferrous metal
prices rose by 29.3 per cent, y-o-y, on top of an increase of 17.5 per cent a
year ago, broadly in line with international trends (Chart
30). Iron and steel prices increased by 7.5 per cent, y-o-y, in contrast to
a decline of 4.2 per cent a year ago. 
Domestic
prices of cement increased by 11.6 per cent, y-o-y, as on March 31, 2007 on top
of an increase of 14.9 per cent a year ago, in consonance with strong domestic
demand emanating from construction activity. Real GDP originating from construction
recorded double digit growth - averaging over 12 per cent per annum - between
2003-04 and 2005-06 on the back of strong housing and other infrastructure activities.
Construction activity remained robust during 2006-07, notwithstanding some deceleration
(9.7 per cent during April-December 2006). Capacity utilisation in the cement
industry remains high (94 per cent during 2006-07 as compared with 90 per cent
a year ago). Other manufactured items contributing to higher y-o-y inflation included
electrical machinery (an increase of 12.8 per cent, y-o-y, as compared with an
increase of 4.1 per cent a year ago) reflecting the higher input prices as well
as strong investment demand. Rise in prices of edible oils (increase
of 14.7 per cent in contrast to a decline of 3.3 per cent a year ago), oil cakes
(increase of 31.0 per cent as against a decline of 8.2 per cent), and grain mill
products (increase of 21.4 per cent on top of an increase of 13.5 per cent a year
ago) also contributed to manufactured products inflation (Chart
31). Edible oils and oil cakes along with oilseeds accounted for more than
one-fifth of headline inflation. Domestic sugar prices declined by 12.7 per cent
(as against an increase of 6.2 per cent a year ago) in line with global trend
reflecting higher production. In order to reduce cost of manufacturing
and infrastructure development, the Government took fiscal measures on January
22, 2007 in the form of reduction in customs duties on select items such as inorganic
chemicals, non-ferrous metals, cement, capital goods and project imports. The
Government further reduced the peak customs duty from 12.5 per cent to 10.0 per
cent in the Union Budget 2007-08 
and, in the case of some items, below the peak rate of 10.0 per cent. On April
3, 2007, the Government decided to exempt import of portland cement from countervailing
duty and special additional customs duty; it was earlier exempted from basic customs
duty in January 2007. In brief, primary articles' contribution to the overall
y-o-y inflation as on March 31, 2007 increased to 40.4 per cent (from 25.8 per
cent a year ago) mainly due to higher prices of wheat, pulses, milk, oilseeds
and raw cotton (Chart 32). Manufactured products group's
contribution also rose to 55.9 per cent (27.7 per cent a year ago) largely on
account of increase in prices of edible oils/oil cakes, metals, cement and electrical
machinery. The contribution of the fuel group to the y-o-y headline inflation,
on the other hand, declined sharply to 4.1 per cent from 45.5 per cent a year
ago.
Consumer Price Inflation Various measures of consumer
price inflation remained higher than the WPI inflation during 2006-07, mainly
reflecting the higher order of increase in food prices as well as the higher weight
of food items in the CPI (Table 39). Food items have
a weight of 69 per cent in the CPI for agricultural labourers, 67 per cent in
the CPI for rural labourers, 47 per cent in the CPI for urban non-manual employees
and 46 per cent in the CPI for industrial workers as compared with 27 per cent
(composite) in WPI. Disaggregated data show that food group inflation in
various CPI measures rose from 4.9-5.8 per cent in March 2006 to 11.2-11.8 per
cent by February 2007. As a result of the higher order of increase in food
prices coupled with their large weight in the indices, various measures of CPI
inflation increased from 4.9-5.3 per cent in March 2006 to 7.6-9.8 per cent in
February 2007. 
Table
39: Consumer Price Inflation : Major Groups | (Year-on-year
variation in per cent) | CPI
Measure | Weight | March
2003 | March 2004 | March
2005 | March 2006 | June
2006 | September 2006 | December
2006 | February
2007 |
1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 | 10 |
CPI-IW
(Base: 2001=100) | General | 100.0 | 4.1 | 3.5 | 4.2 | 4.9 | 7.7 | 6.8 | 6.9 | 7.6 |
Food, Beverages etc. | 46.2 | 3.7 | 3.1 | 1.6 | 4.9 | 10.0 | 8.9 | 9.6 | – |
Pan, Supari etc. | 2.3 | 1.9 | 4.2 | 2.1 | 3.1 | 3.7 | 4.2 | 4.3 | – |
Fuel and Light | 6.4 | 6.3 | 6.5 | 4.9 | -2.9 | 8.7 | 6.5 | 5.9 | – |
Housing | 15.3 | 5.4 | 3.9 | 20.4 | 6.6 | 6.6 | 7.1 | 7.1 | – |
Clothing, Bedding etc. | 6.6 | 1.5 | 2.1 | 2.3 | 3.0 | 2.8 | 2.5 | 4.0 | – |
Miscellaneous | 23.3 | 5.3 | 3.2 | 3.9 | 4.6 | 4.7 | 5.4 | 4.1 | – |
CPI-UNME
(Base: 1984-85=100) | General | 100.0 | 3.8 | 3.4 | 4.0 | 5.0 | 6.5 | 6.6 | 6.9 | 7.8 |
Food, Beverages etc. | 47.1 | 2.6 | 3.0 | 2.2 | 5.3 | 8.9 | 8.4 | 9.2 | 11.2 |
Fuel and Light | 5.5 | 3.1 | 3.2 | 9.6 | 1.9 | 3.0 | 4.2 | 5.9 | 5.6 |
Housing | 16.4 | 6.3 | 5.2 | 7.5 | 5.5 | 5.5 | 5.5 | 5.5 | 5.8 |
Clothing, Bedding etc. | 7.0 | 2.6 | 2.6 | 2.0 | 2.9 | 2.7 | 3.4 | 3.8 | 3.6 |
Miscellaneous | 24.0 | 6.0 | 2.8 | 4.4 | 5.1 | 6.1 | 6.5 | 4.6 | 4.6 |
CPI-AL
(Base: 1986-87=100) | General | 100.0 | 4.9 | 2.5 | 2.4 | 5.3 | 7.2 | 7.3 | 8.9 | 9.8 |
Food, Beverages etc. | 69.2 | 6.0 | 1.6 | 2.2 | 5.5 | 8.3 | 8.0 | 9.9 | 11.8 |
Pan, Supari etc. | 3.8 | 3.5 | 4.7 | -1.3 | 6.6 | 5.8 | 6.5 | 7.2 | 6.2 |
Fuel and Light | 8.4 | 4.8 | 3.0 | 3.0 | 4.3 | 6.4 | 7.8 | 7.3 | 6.6 |
Clothing, Bedding etc. | 7.0 | 3.0 | 4.1 | 2.5 | 2.2 | 2.5 | 3.3 | 3.3 | 3.2 |
Miscellaneous | 11.7 | 3.1 | 2.7 | 5.5 | 5.5 | 5.2 | 7.0 | 7.4 | 6.8 |
CPI-RL
(Base: 1986-87=100) | General | 100.0 | 4.8 | 2.5 | 2.4 | 5.3 | 7.2 | 7.0 | 8.3 | 9.5 |
Food, Beverages etc. | 66.8 | 5.6 | 1.9 | 1.9 | 5.8 | 8.3 | 8.0 | 9.6 | 11.5 |
Pan, Supari etc. | 3.7 | 3.5 | 4.7 | -1.0 | 6.3 | 5.8 | 6.3 | 7.4 | 6.0 |
Fuel and Light | 7.9 | 4.8 | 3.0 | 2.9 | 4.0 | 6.1 | 7.2 | 7.3 | 6.3 |
Clothing, Bedding etc. | 9.8 | 3.3 | 3.4 | 2.8 | 2.7 | 2.9 | 3.5 | 2.9 | 2.9 |
Miscellaneous | 11.9 | 3.1 | 3.0 | 5.5 | 5.2 | 4.9 | 6.4 | 7.2 | 6.3 |
Memo: | | | | | | | | | |
WPI Inflation (End of period) | | 6.5 | 4.6 | 5.1 | 4.1 | 4.8 | 5.4 | 5.9 | 6.1 |
GDP Deflator | | 3.9 | 3.7 | 4.2 | 4.4 | 4.3 | 4.4 | 5.0 | – |
IW : Industrial Workers
UNME : Urban Non-Manual Employees AL : Agricultural Labourers RL : Rural
Labourers | Higher fuel group prices also contributed to
CPI inflation. Prices of services proxied by "miscellaneous group"
exhibited a mixed trend, recording acceleration in February 2007 (as compared
to March 2006) in the case of CPI-AL and CPI-RL and deceleration in the case of
CPI-UNME. Housing inflation (reflecting rents on housing) rose to 7.1 per cent
in January 2007 from 6.6 per cent in March 2006 in CPI-IW and to 5.8 per cent
in February 2007 from 5.5 per cent in March 2006 in CPI-UNME. Asset
Prices Domestic equity and bullion markets recorded gains during 2006-07,
with intermittent corrections during the course of the year. Domestic equity prices
fell during May and early June 2006 in line with international equity markets
on concerns that monetary tightening might slow prospects for global growth.
Equity prices recovered thereafter and the BSE Sensex touched a peak of 14652
on February 8, 2007 before witnessing some correction thereafter (see Chapter
V). Overall, the BSE Sensex gained 15.9 per cent during 2006-07 (Chart
33). Domestic gold prices increased by about 10 per cent during 2006-07, broadly
mirroring movements in international prices. International gold prices initially
rose to US $ 715 per ounce on May 12, 2006 but fell to US $ 559 as on June 14,
2006 in consonance with the trends in various commodities in the international
market. Gold prices recovered to US $ 664 per ounce as on July 14, 2006 but again
eased to below US $ 600 per ounce in the second week of September 2006 as headline
inflation in major economies eased in tandem with softening of international crude
oil prices. Gold prices rebounded in the fourth quarter of 2006 and gained further
during January-February 2007 to US $ 687 per ounce in late February 2007. Prices
softened to around US $ 660 per ounce by end-March 2007. 
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