The central bank in a study published in its October-December quarterly also assumed that Indian inflation would appear to have a more direct effect on the Bangladesh food price induced inflation than price developments in other food-exporting countries.

"The moderation of inflation in the quarter under review is mainly attributed to seasonal factors. Both the external pressure on prices and demand side inflationary expectations in the domestic economy, however, appear to persist," the study said.

However in a rapidly globalising world, it would be important for the policy makers to monitor future development of food prices in India and in other potential trading partners, it said.

The net impact of recent fuel price is unlikely to be significant but it would have effect on poor people, whose livelihood depends on the use of kerosene and diesel. The toll is likely to be significant unless alleviated through targeted means of transfers, preferably in cash, it said.

The BB study said the gradual easing of consumer price index (CPI) inflation, which had started in the first quarter of the current fiscal year (FY) also continued in the second quarter. The December inflation figures came well within the central bank's target of up to 7 per cent set for the first half of the current FY.

In order to catch up with the cost of imported oil, domestic prices have just been announced to go up immediately, which will result in a one-shot increase in CPI followed by a round of gradual adjustment, it said.

The uncertain political environment and the accompanying transport and other logistical disruption impacted on the overall economic activities during the second quarter of FY 2007.

The reduced rice production indicated a fall in the growth in agriculture, although the central bank had predicted in October that the growth rate for the fiscal year would lie between 6.6 to 7.1 per cent, the quarterly said.

No significant adjustments appear necessary for the industrial or service sectors. The overall output growth for FY 2007 is thus likely to be close to the bottom of the range earlier predicted, it said.

The study said that faster growth of expenditure than revenue pushed the fiscal deficit higher.

It said overall government revenue (both tax and non-tax) and expenditure increased by 10.6 and 27.34 per cent respectively during the period over the corresponding quarter of FY06.

The expenditure of Annual Development Plan (ADP) also rose by 25 per cent in 2006. Given the decline of foreign assistance, the budgetary deficit has been accommodated by expanding domestic bank borrowing during the first two quarters of the current FY, it mentioned.

The current account balance recorded a strong 38.18 per cent growth in the second quarter, which is much higher than the previous quarter's growth, it said.

The monetary policy measures for the next quarter will have to be well coordinated within administrative and fiscal measures in order to not lose the grip on inflationary expectations while keeping the growth targets in sharp focus.

The central bank study said the anti-money laundering and anti-corruption drives by the present government and the National Board of Revenue's (NBR) move to expand the tax net are expected to yield positive results in terms of revenue gains for the government as well as for National Commercial Banks' (NCBs) solvency through faster recovery of classified loans.

Moreover, the impact of longer term reforms such as restructuring of state-owned enterprises, NCB corporatisation and related steps are likely to lead to greater financial sector stability down the road, it noted.