RBI had a strong message for everybody in its mid-quarter monetary policy review: Brace yourself for a spell of high inflation, at least in the near-term.
High inflation also means that RBI will hesitate to cut interest rates, a step needed to boost economic growth.
“Wholesale price inflation, which had eased in the first quarter (April-June) of 2013-14, has started rising again as the pass-through of fuel price increases has been compounded by the sharp depreciation of the rupee and rising international commodity prices,” RBI said.
“The current assessment is that in the absence of an appropriate policy response, WPI inflation will be higher than initially projected over the rest of the year,” it said.
Skyrocketing onion and vegetable prices and costlier staples such as rice pushed India’s wholesale inflation to 6.10% in August, adding to an array of problems for the government battling to the steer the country out of a web of economic mess.
The RBI has warned that the price curve is unlikely to turn downwards anytime soon
The government faces a potent mix of high inflation, a falling currency and poor economic growth at the worst possible time — key state elections are just months away, and national polls less than a year distant.
Retail price data, which was released last week, broadly mirrored similar trends with shop-end prices of vegetables and cereals soaring sharply in July by 26.28% and 13.65%, respectively.
India’s retail inflation stood at 9.52% in August, marginally lower than 9.64% in the previous month.
“What is equally worrisome is that inflation at the retail level, measured by the consumer price index (CPI), has been high for a number of years, entrenching inflation expectations at elevated levels and eroding consumer and business confidence,” the RBI said.
“Although better prospects of a robust kharif harvest will lead to some moderation in CPI inflation, there is no room for complacency,” RBI said.