Deficient monsoon to worsen price situation,govt deficit: RBI

RBI warned that deficient monsoon and poor farm output will worsen the inflationary situation,besides putting pressure on the government to raise expenditure on subsidies and other relief measures.

The Reserve Bank warned that deficient monsoon and poor farm output will worsen the inflationary situation,besides putting pressure on the government to raise expenditure on subsidies and other relief measures.

Deficient monsoon and the possible adverse effects on agricultural output may not only put pressures on food prices but also increase the demand for more subsidies and relief measures, the RBI said in its annual report for 2008-09.

Finance Minister Pranab Mukherjee had earlier said 252 districts out of a total of about 600 are hit by drought which could lead to decline in kharif (summer crop) output by 15 to 20 per cent.

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RBI report further said that Wholesale Price Index-based inflation,which has been in the negative for past 11 weeks,will turn positive in October with the base effect expected to fade gradually. Inflation soared to 12.9 per cent during October last year.

Noting that prices of food continue to remain high,the report said,the supply side of food management would assume critical significance for the government. Measures to mitigate drought by further expanding public expenditure and importing essential commodities to supplement domestic supply,it added,would put more pressure on the expansionary fiscal situation.

The RBI report further said that large borrowing programme of the government would not only worsen the inflation situation but will also put pressure on interest rates.

Large borrowing programmes and high fiscal deficits complicate the challenge even further by accentuating inflationary expectations,which could worsen the actual inflation situation over time while also putting upward pressure on interest rates, it said,pointing out various challenges before the RBI in the days ahead.

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The governments market borrowing programme for the current fiscal has been pegged at Rs 4.51 lakh-crore,up from Rs 3.1 lakh crore in the previous fiscal.

On returning to nine per cent economic growth trajectory,the RBI report said,It would largely be determined by the countrys structural fundamentals and the responsive macro policy environment. Having registered an average growth of nine per cent for the three years ending March 2008,the economic growth rate slipped to 6.7 per cent in the last fiscal,mainly on account of the global financial crisis.

Deficient rainfall and consequent impact on farm output is likely to further depress the economic growth rate during the current fiscal.

The RBI has pegged the economic growth rate for the current fiscal at six per cent with upward bias.