The Reserve Bank of India (RBI) once again flagged concerns about inflation in its Annual Report 2012-13 released today. According to the central bank although headline inflation had moderated in the first quarter of 2013-14 to an average of 4.7%, risks on the inflation front are still significant.
“First, this is evident in a rebound in inflation to 5.8% in July 2013. Creeping inflation pressures are visible arising from rising food and fuel prices, the latter in large part due to exchange rate depreciation. Second, while Wholesale Price Index (WPI) inflation has moderated, Consumer Price Index (CPI) inflation remains close to double digits,” said RBI in the annual report.
According to RBI, although food inflation came down from its high of January, 2013, it has resurfaced since May 2013. Besides that the pass-through of the depreciation of the rupee exchange rate by about 11% in the first four months of the current fiscal is incomplete and will put upward pressure as it continues to feed through to domestic prices.
“The exchange rate pass-through has declined in recent years. However, increase in inflation could occur, given the significant depreciation of the rupee,” said RBI.
But RBI agrees that the inflation outlook appears to be better than in the previous year. In its annual policy statement of monetary policy on May 3, RBI projected WPI inflation to be range-bound around 5.5% during 2013-14, keeping in view the domestic demand-supply balance, the outlook for global commodity prices and the forecast of a normal monsoon. RBI had also said that they would endeavour to condition the evolution of inflation to a level of 5% by March 2014, using all instruments at its command.
RBI is also of the view that on the demand-supply balance, the supply may turn out to be slightly weaker than assessed earlier. “Demand deceleration continues, but rural demand may stay robust in the wake of a likely good crop in the back of normal monsoon. The outlook for global commodity prices largely remains benign, but risks of price increase on-shore have increased following the rupee depreciation and firming up of global crude prices during July 2013. Therefore, some price pressures my build up in the latter half of 2013-14,” said RBI in the report.
But according to the central bank the normal monsoon has taken a major risk off the horizon, although the renewed upsurge in food prices in the first four months of 2013-14 implies that a close vigil is necessary so that the relative price change does not affect the general level of prices.
