A day after upping its short-term rates, the Reserve Bank of India (RBI) today said that it expects inflation to fall from the current level of double digits to 6 per cent by this fiscal-end due to moderating food prices, easing commodity rates and the impact of its monetary actions.
The current tight liquidity situation would ease next week, the central bank said, but added that it would not be a surplus money scenario even then.
"We are looking at three drivers--food prices, we should see softening...We do expect softening impact on commodity prices as global demand does not materialise as strongly as was expected. It will affect oil prices. The third factor-our actions taken in the first half of the year will start to have an impact in the second half," RBI Deputy Governor Subir Gokarn said during a teleconference with analysts.
In its monetary review, RBI had yesterday said that the prospects of softening inflation around mid-year 2010-11 are contingent on moderating food prices.
"Rainfall has been generally adequate so far, indicating good prospects for the agricultural sector. But, with two months yet to go for the season, the risk of inadequate rainfall adversely affecting specific regions and crops remains," it added.
The review said that uncertainty about the pace of global recovery has softened global energy and commodity prices.
"This trend has been reinforced by the slowdown of the Chinese economy. Consequently, global inflationary pressures are expected to be subdued," the review had said.
Yesterday, RBI had raised the short-term borrowing (reverse repo) rate by 50 basis points and lending (repo) rate by 25 basis points to ease inflation.
However, it refrained from raising the cash reserve ratio (CRR) since the liquidity in the system was strained due to the over Rs 1 lakh crore outgo towards payment for spectrum by telecom companies.
In the same interaction, RBI Governor D Subbarao said, "The liquidity situation has eased from extreme tightness...We expect further easing in the next week or so as the government starts salary disbursement, there will be some redemption from bonds...There will be further easing of the liquidity situation."
He, however, added that the money supply situation will not result in a complete return to the surplus situation.
"We expect that there (money supply) will be more in the deficit mode than in surplus mode," Subbarao said.
To a query as to what should be the desired rate of inflation for 10 per cent growth rate, Subbarao said,"In the short-term, there could be a trade-off between growth and inflation. But in the medium term, there is no trade-off and I think it is important to have low inflation for having high growth."
