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The Reserve Bank is expecting retail inflation to rise to 5.1 per cent in the last quarter of the ongoing fiscal due to rising crude oil prices and hike in salary components of government employees.
The central bank has also projected inflation to be in the range of 5.1-5.6 per cent in the first half of 2018-19.
Meanwhile, the RBI has kept the key repo rate, at which it lends to banks, unchanged at 6 per cent.
"Domestic pump prices of petrol and diesel rose sharply in January, reflecting lagged pass-through of the past increases in international crude oil prices. Considering these factors, inflation is now estimated at 5.1 per cent in fourth quarter, including the HRA (house rent allowance) impact," the RBI said in its 6th bi-monthly policy statement on Wednesday.
The decision of the Monetary Policy Committee (MPC) is consistent with the neutral stance of monetary policy in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4 per cent within a band of +/- 2 per cent, while supporting growth, the statement said.
In its previous monetary policy statement in December, the RBI had given the consumer price index (CPI) based inflation forecast in the range of 4.3-4.7 per cent, which it had revised upwards from previous estimate, for second half (October-March) of 2017-18.
During the third quarter ended December, the headline inflation averaged to 4.6 per cent, mainly due to an unusual pick-up in food prices in November, the RBI said.
Though prices eased in December, the winter seasonal food price moderation was less than usual, it said.
Going forward, the RBI said inflation outlook beyond the current year is likely to be shaped by several factors such as international crude oil prices that have been firming up since August 2017 as well as global pick-up in prices of non- oil industrial raw material.
In a scenario of improving economic activity, rising input costs are likely to be passed on to consumers. The inflation outlook will depend on the monsoon, which is assumed to be normal, it said.
"Taking these factors into consideration, CPI inflation for 2018-19 is estimated in the range of 5.1-5.6 per cent in first half, including diminishing statistical HRA impact of central government employees, and 4.5-4.6 per cent in second half, with risks tilted to the upside," according to the RBI policy statement.