The Reserve Bank today expected inflation to come down to 6 per cent by the end of this fiscal from the current level of over 10 per cent, but said high rate of price rise is likely to continue for some more time as demand pressures are building up in the economy.
Earlier, the apex bank had projected inflation at 5.5 per cent by March 2011, and the latest higher estimate is on account of the impact of fuel price hike,which it said, is likely to add a full 1 percentage point directly to the headline inflation numbers with the second round impact coming in the next few months.
To cool inflation, the central bank today raised short-term lending rates by 0.25 per cent and overnight borrowing rate by 0.50 per cent.
"Non-food inflation has risen and demand-side pressures are clearly evident. With growth taking firm hold, the balance of policy stance has to shift decisively to containing inflation and anchoring inflationary expectations," the RBI said in its quarterly monetary policy review here today.
The overall inflation has been in double-digits for the past five months and the June figures stood at 10.55 per cent. "If this pattern continues, final WPI inflation numbers for the coming months can be expected to be higher," it said.
The central bank said the prospects of softening of inflation around the middle of this fiscal are contingent on moderating food prices. Despite moderation, food inflation stood at a higher level of 12.47 per cent for the week ended July 10.
The Reserve Bank said rainfall has been generally adequate so far, indicating good prospects for the farm sector. But, with two months yet to go for the season, the risk of inadequate rainfall adversely affecting specific regions and crops remains, it cautioned.
The apex bank said it had earlier expected inflation to be 5.5 per cent by this fiscal-end. "Subsequently, there has been an increase in prices of many administered /regulated items such as petroleum products, iron ore and electricity," it added.
RBI said there can be an up to 1 per cent impact on WPI-inflation owing to fuel price hike. In June, the government had raised petrol prices by Rs 3.5 a litre while decontrolling it and hiked diesel prices by Rs 2 a litre, LPG by Rs 35 a cylinder and kerosene by 3 a litre.
"Assuming that global crude oil prices remain stable, the immediate impact on inflation will be about 1 percentage point on WPI inflation, with second round effects coming through in the months ahead," the RBI said.
It said going forward inflation outlook will be determined on the basis of the Kharif harvest, global commodity prices and build-up of demand side pressures.
The apex bank said the main objective of RBI in medium term would be to bring down inflation to 3 per cent.