India Economy Review by Capital Market – June 2006

The Indian economy is marching ahead well on its course. It posted a growth of 8.4% in 2005-06 — higher than the projected 8.1% growth in the advance estimates announced in February 2006. The major risk to growth was estimated from domestic inflation as crude oil prices were rising in the international markets. However, the average inflation at 4.5% in 2005-06 was within the estimated range of 5-5.5%. It was mainly on account of the incomplete passthrough of increase in oil prices in 2005-06, the Reserve Bank of India’s intervention in the market to manage liquidity, and the sustained growth of the economy resulting in the absorptive capacity of the systems. The current financial year started with a lower inflation rate of around 3.24%.

But the overall inflation gradually moved up in the last eight weeks to touch 4.74% in the week ended 20 May 2006 due to rising prices of food articles in the primary articles group. While headline inflation was rising, the latest hike in retail prices of domestic petroleum products posed a further risk to domestic inflation.

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