Making a case for increasing prices of petroleum products and deregulating diesel prices, the Reserve Bank on Monday said these steps are necessary to contain fiscal slippages and arrest decline in growth.

“The policy design to achieve macro-objectives hinges on deregulation and the upward adjustment of oil prices by letting the demand effects work towards diminishing fiscal and external risks,” the RBI said in its Macroeconomic and Monetary Developments in 2011-12.

While petrol prices are market-linked, the government decides the rates of LPG, kerosene and diesel, which usually results in a large budgetary expenditure on subsidies.

“This would provide space for fiscal and monetary policy to act in tandem to achieve the growth and inflation objectives in 2012-13 that otherwise appears to be at cross purposes,” it said.

The RBI said that the imports bill will remain high unless prices of petroleum products are raised for a complete pass-through and demand for precious metals is curbed.

Crude oil prices have been rising due to geo—political reasons, including the Iran situation. The prices had touched a high of $125 a barrel last month.

Related Topics