The Reserve Bank of India (RBI) on Monday said it expected inflation to stay around current levels in this financial year, 2012-13, though in the short term there are risks of a spike due to the waning base effect in food prices, lagged pass-though impact of rupee depreciation and stubborn global commodity prices.
The Wholesale Price Index was 6.89 per cent in March 2012, in line with the central bank's projection. The overall headline inflation had started easing from November 2011, after staying high for two years.
"Inflation in 2012-13 is likely to remain around current levels. Importantly, the near-term trajectory is subject to significant upside risks," said RBI in its ‘Macroeconomic and monetary developments’ report for 2011-12, released on Monday.
It is set to announce the annual monetary and credit policy for the current financial year tomorrow. RBI said monetary policy needed to keep inflation expectations anchored in this environment of significant upside risks.
The central bank said high oil prices and unsustainable levels of suppressed inflation, higher freight rates and taxes, sustained wage pressures and the structural nature of protein-food inflation also posed upside risks to domestic inflation in the short term.
Food inflation started easing in recent months, mostly due to a seasonal decline in vegetable prices and a favourable base effect. RBI said the spatial and temporal distribution of the southwest monsoon would be a major determinant of short-term food inflation. Also, the supply-side measures announced by the government in this year's Union Budget would help contain food inflation, though the impact would be realised only with a lag.
The non-food manufacturing inflation, or core inflation, also showed a downward trend. It fell below five per cent in March. However, the increase in railway freight rates and the roll back of an earlier cut in excise duty will increase cost pressures, pushing up the prices of non-food manufactured products in the short term.
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RBI said fuel inflation risks remain 'significant' in the near term, even if global crude prices moderate but deregulation of fuel prices would help ease the pressure in the long run. "The Union Budget 2012-13 has budgeted a lower amount towards fuel subsidy; if subsidies have to be contained within budgeted limits, it would require significant revision in administered fuel prices, which would lead to spike in price levels," said RBI.
The central bank said there were upside risks to global commodity prices and its impact was bound to be more on emerging and developing economies than on advanced economies, on the back of higher consumption baskets.
Higher coal prices and higher electricity prices on account of higher input costs would also pose near-term risk to overall inflation, RBI said.