Though inflation has moderated, it is likely to remain sticky at the current level during the year, and the risks to inflation remains on the upside, the Indian central bank said on Monday, a day ahead of its monetary policy review.
The probability of further significant moderation in inflation is small, the Reserve Bank of India (RBI) said in its report on Macroeconomic and Monetary Developments in 2011-12.
"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 bank said.
Data released today showed that the wholesale price inflation eased to 6.89 percent in March from 6.95 percent in February. The figure came in above economists' expectations. Food inflation accelerated to 9.94 percent from 6.07 percent.
The central bank is widely expected to deliver a 25 basis point reduction in the repo rate tomorrow, which will take it down to 8.25 percent. The repo rate is the rate at which central bank lends to banks.
The RBI expects energy prices to remain the significant source of inflation going forward due to upward adjustment in domestic prices of oil, coal and electricity. Wage price pressures are yet to soften and consumer price inflation remains high, the bank said. Inflation expectations are seen high.
"With significant upside risks to inflation, monetary policy needs to keep them anchored, while shifting the balance of policy to arrest the deceleration in growth momentum," the RBI said.
The central bank forecast domestic growth to improve modestly in fiscal 2012-13 and said the global economy is unlikely to slip into another recession despite a dip in growth.
Citing early indicators such as pick up in credit, cement off-take, expansion mode in PMIs, uptick in the services composite indicator, the RBI said growth may have bottomed out in the third quarter of fiscal year 2011-12. The bank expects recovery ahead to be slow.
Welcoming the government's plan to cap fuel subsidies to 2 percent of GDP, the bank warned that upside risks stem if phasing-in of flexible pricing of administered petroleum products is delayed. Under-recoveries would then exceed those in 2011-12 causing a large fiscal slippage, which would pose challenges for demand management during 2012-13, it added.
Stressing on the need for greater prudence in external sector and demand management policies, the bank said export growth may slow and the import bill could remain high unless fuel prices are raised for a complete pass-through and demand for precious metals is curbed.
"While capital inflows have improved in Q4 of 2011-12, global uncertainties aggravate downside risks to the external outlook," the bank said.
The central bank noted that the liquidity deficit eased this month due to large government spending. It also pointed out that the revival in the Indian financial markets during the four quarter of 2011-12 ended March 31, was "primarily liquidity-driven".
"For recovery to be sustained, macroeconomic fundamentals need to improve," the bank said.
by RTT Staff Writer
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