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Oil price to increase fiscal burden, warns RBI

Our Bureau

Mumbai , Oct. 24

THE Reserve Bank of India has repeated its warning that unless the Government passes on the increase in international oil prices to the domestic market, it will pose a significant risk to the country's fiscal situation.

"The hike in international oil prices and the possibility that they may remain high longer than anticipated earlier will continue to pose significant risk to the fisc, directly or indirectly, unless appropriately passed on," the RBI said in the `Macro-economic and Monetary Developments-mid-term review,' released on Monday, a day before the bank's mid-year policy review.

Earlier, the RBI, in its annual report, had also cautioned the Government if domestic oil prices are not allowed to keep pace with the international price, the fiscal burden of the Government could increase and also hurt investors of public sector oil companies.

The RBI said global oil costs have been only partially passed on to the economy.

Inflationary pressures: Referring to the inflationary pressures, the RBI said year-on-year inflation fell to 3 per cent on August 27, 2005 from 5.1 per cent at March-end 2005. It has since then increased to 4.6 per cent as on October 8, 2005.

Fiscal and monetary measures undertaken since mid-2004 to reduce the impact of imported price pressures on domestic inflation and stabilise inflationary expectations, coupled with base effects and the revival of monsoon, enabled the moderation in headline inflation from its high of 8.7 per cent last year.

However, when a significant part of the permanent component of oil price increase is yet to be passed on, there is a need to consider two factors.

First, the advisability of treating the oil price increase as a shock rather than a permanent shift in relative prices may need to be questioned; and, second, the inevitability of second order effects on inflation needs to be taken on board.

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