The hike in fuel prices and train fares may prevent headline inflation from moderating in the near-term, feels C Rangarajan, chairman of prime minister's economic advisory council.
"We expect, under normal situation, the inflation to come down to about 7% by March. But of course we are taking actions in order to correct the suppressed inflation...They may come in the way of headline inflation coming down. But in the medium-term it (fuel price and fare hikes) it is a right kind of decision," Rangarajan said during his inaugural address in a conference organised by the Indian Institute of Foreign Trade here today.
He remained confident that inflation will ease to 6% by the end of next financial year.
On Wednesday, the government increased rail fares by up to 25%. This was the first time in 10 years that fares have been increased. It is learnt that government may also raise diesel and subsidised liquefied petroleum gas (LPG) prices in a phased manner.
It had capped the number of subsidised LPG cylinders and increased the diesel price by Rs 5 a litre in September.
Rangarajan said that these steps were necessary for fiscal consolidation even though they may lead to higher-than-expected inflation rate in the near-term.
India's wholesale price index-based inflation increased at its slowest pace in 10 months in November and rose 7.24% from a year earlier. The easing price pressure raised hopes of reduction in interest rates in January.
The Reserve Bank of India (RBI) has been keeping the policy rates firm as inflation continued to remain above its comfort zone.
"I think RBI will wait for the price data that will come in a few days and that will be a key factor in determining their action in the next policy," Rangarajan said.
The data on inflation for December will be released on January 14, a fortnight before RBI's third quarter review on monetary policy.
Rangarajan said growth in India's gross domestic product (GDP) is likely to be around six% in the current financial year. He, however, was confident that GDP growth will accelerate to seven% in 2013-14 because of improved investment sentiments and capacity creation in the infrastructure space.
"I believe 8-9% growth is essential for improving the living standard of our people. The domestic factors alone will help us to go back to eight% growth rate. If global situation also improves we will be looking at nine% growth," he said.
He also added that there was a need to dissuade people from importing gold to narrow the current account deficit.
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