The Reserve Bank of India (RBI), on Monday, said inflation would likely to remain around current levels this financial year.
“The path of inflation in 2012-13 could remain sticky around current levels due to high oil prices, large suppressed inflation, exchange rate pass-through, impact of freight and tax hikes, wage pressure and structural impediments to supply response,” the RBI said on the eve of its annual policy announcement
The apex bank hopes that growth is likely to improve moderately in 2012-13. However, it reiterated, ‘while inflation has moderated, risks to inflation are still on the upside.”
Earlier, on Monday, it was reported that annual Wholesale Price Index (WPI) inflation for March was 6.89 per cent, mainly driven by higher food prices. This exceeded forecasts by analysts.
“Monetary policy would…. need to support growth without risking external balance or inflation by excessively fuelling demand,” it added in its document Macroeconomic and Monetary Developments in 2011-12. The document serves as a backdrop to the Monetary Policy Statement 2012-13 to be announced on Tuesday.
It is widely expected that the central bank is likely to cut rates — at least by 25 basis points — on Tuesday after raising them 13 times between March 2010 and October 2011.
Since then, the RBI left interest rates on hold. In the meantime, the RBI had reduced the Cash Reserve Ratio (CRR) by 125 basis points to address the structural liquidity deficit, which pumped around Rs.80,000 crore in to the financial system.
Weakest growth rate
The weakest growth rate in nearly three years was witnessed at 6.1 per cent in the third quarter of 2011-12. It was generally accepted that the growth rate would remain below 7 per cent for the year ended March 31, 2012.
“Early indicators suggest that growth may have bottomed out in the third quarter of 2011-12 but recovery may be slow during 2012-13. Lower global demand, domestic policy uncertainties and the cumulative impact of monetary tightening lowered the growth rate to below 7 per cent over the last two quarters,” the RBI noted.
The RBI said monetary policy had to recognise the need for keeping inflation expectations anchored in an environment of significant upside risks to inflation, while shifting the balance of policy to check the deceleration in growth momentum.
