High oil prices, volatile exchange rate risk to inflation: RBI

Reserve Bank today said inflation will remain below 5 per cent in the January-March quarter of this fiscal but hardening of global crude oil prices and volatility in exchange rates could put upside pressure in the next financial year.

It projected inflation to be in the range of 4-4.5 per cent in the first half and 4.5-5 per cent in the second half of FY2017-18.

"Headline CPI inflation in the fourth quarter of 2016-17 is likely to be below 5 per cent. Favourable base effects and lagged effects of demand compression may mute headline inflation in the first quarter of 2017-18. Thereafter, it is expected to pick up momentum, especially as growth picks up and the output gap narrows," the central bank said.
 

Inflation is expected to pick up momentum, especially as growth picks up and the output gap narrows. Moreover, base effects will reverse and turn adverse during the third and fourth quarter of 2017-18, it said.

The apex bank also outlined three significant upside risks that trigger some uncertainty to the baseline inflation path -- the hardening profile of international crude prices, volatility in the exchange rate on account of global financial market developments and the fuller effects of the house rent allowances under the 7th Central Pay Commission (CPC) award.

The focus of the Union Budget on growth revival without compromising on fiscal prudence should bode well for limiting upside risks to inflation, the central bank said.

"The Committee remains committed to bringing headline inflation closer to 4 per cent on a durable basis and in a calibrated manner," it added.

This would require further significant decline in inflation expectations, especially since the services component of inflation that is sensitive to wage movements has been sticky.

The Reserve Bank today kept key interest rate unchanged at 6.25 per cent saying it wants to assess how the transitory effects of demonetisation on inflation and the output gap play out.

The RBI looks at retail or consumer price-based inflation to decide monetary policy stance. The retail inflation stood at 3.41 per cent in December 2016.