In its pre-monetary policy review, the Reserve Bank of India (RBI) has indicated that inflation will harden by the end of the year, mainly due to the base effect.
RBI said in addition to this, increase in commodity prices, delay in monsoon, expansionary fiscal and monetary policies and inflation expectations not declining with the WPI (wholesale price index) would put upward pressure on inflation.
However, it added that the consumer price inflation and prices of food articles continued to remain firm and, therefore, inflation expectations were not moderating with the decline in WPI inflation.
“While certain indicators suggest possible firming up of inflation over time, other developments could keep inflationary pressures subdued,” said the central bank. RBI added that the low inflation environment could continue only if the current global recession was prolonged and led to lower commodity prices, agricultural growth remained unaffected by the delay in the monsoon and the monetary policy stance returned to normal.
The central bank said the decline in the year-on-year inflation reflected the statistical factor of high base due to the sharp rise in commodity prices in the first half of 2008-09.
The WPI inflation turned negative in June 2009. However, inflation in food articles, both primary and manufacturing, remained high. It was 8.9 per cent as on July 11, 2009. Moreover, inflation according to consumer price indices (CPIs) remained at 8.6-11.5 per cent.
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Increase in commodity prices, particularly of oil, in the first quarter of 2009-10 pointed to the possibility of commodity and food prices going up, RBI said.
Other factors indicating firming up of inflation were pressure from sugar and oil cakes and inflexible CPI inflation, it said.
The delay in monsoon, increase in minimum support price of crops and implications of the fiscal stimulus as well as the monetary policy are likely to lead to an increase in inflation, it says.
“The recent increase in the WPI was largely on account of the upward revision in prices of petrol and diesel that was effective from July 2, 2009, increase in prices of freely priced products under the fuel group in line with hardening of crude oil prices and higher prices of vegetables, oilseeds, oil cakes, raw cotton, and drugs and medicines,” said the central bank.