A cautious Reserve Bank of India Tuesday said it sees headline inflation cooling down to 6 per
cent by March from the present double-digit level and that its policy action will now be focused more on ensuring that the inflation moderates to a comfortable level.
This comes on the heels of the Prime Minister of India over the weekend projecting WPI inflation halving to 6 per cent by December from the present 10.55 per cent as of June.
The central bank had earlier projected inflation at 5.5 per cent by the end of this fiscal and the latest higher estimate is due to the fuel price hike. High inflation is likely to continue for some more time as demand pressures are building up in the economy, the central bank said.
"Non-food inflation has risen and demand-side pressures are clearly evident. With growth taking a firm hold, the balance of policy stance has to shift decisively to containing
inflation and anchoring inflationary expectations," RBI said in its quarterly monetary policy review here today.
To cool inflation, RBI Tuesday raised short-term lending and borrowing rates by 0.25 and 0.50 percentage points.
The overall inflation has been in double-digits for the past five months and the June figures stood at 10.55 per cent.
If the pattern continues, final WPI inflation for next months can be expected to be higher, RBI said.
Prime Minister Manmohan Singh last week said food prices would soften in H2 and overall inflation will come down to around 6 per cent by December.
On the PM's forecast, RBI Governor D Subbarao said, "the Prime Minister gets information from other sources also."
RBI said the prospects of softening inflation by the middle of this fiscal are contingent on moderating food prices. Despite moderation, food inflation stood at a higher
level of 12.47 per cent for the week ended July 10.
Monsoon has been generally adequate so far, indicating good prospects for the farm sector growth, the Governor said.
But with two more months to go for the season,risk of rainfall shortage impacting specific regions and crops remains,Subbarao
cautioned and said, "all of us are chasing the monsoon."
Later in the day, Planning Commission deputy chairman Montek Singh Ahluwalia reiterated the PM's outlook. "We expect by December inflation would be around 6 per cent, but RBI
figure is for March. In both the cases a significant decline in inflation rate bringing it down to comfort level is definitely on the cards," he said.
Last week, the Prime Minister's Economic Advisory Council had forecast a higher inflation of 6.5 per cent by March. To a query whether RBI sees any upside risk to its view on the inflation, Subbarao said he did not.
RBI said it had earlier expected inflation to be 5.5 per cent by this fiscal-end. "Subsequently, there has been an increase in prices of many administered/regulated items such
as petroleum products, iron ore and electricity," it added.
The central bank said there can be an up to 1 per cent impact on WPI-inflation owing to fuel price hike. In June, the government had raised petrol prices by Rs 3.5 a litre while decontrolling it and hiked diesel prices by Rs 2 a litre, LPG by Rs 35 a cylinder and kerosene by 3 a litre.
"Assuming that global crude oil prices remain stable, the immediate impact on inflation will be about 1 percentage point on WPI inflation, with second round effects coming through in the months ahead," it said, adding going forward inflation outlook will be determined on the basis of the Kharif harvest,
global commodity prices and build-up of demand side pressures.
The apex bank said the main objective of RBI in medium term would be to bring down inflation to 3 per cent.