Inflation likely to moderate later this year: RBI

Inflation is likely to moderate towards the later part of the year on the back of possible softening of global prices and tight monetary action, the Reserve Bank of India said on Saturday.

At the same time, the central bank emphasised on the urgent need to address supply side bottlenecks which could hamper inflation management over the long run.

“While inflation is expected to moderate towards the later part of the year reflecting monetary tightening and likely softening of global commodity prices, fiscal policy needs to be supportive in containing aggregate demand,” Deepak Mohanty, executive director of RBI said on Saturday in a speech delivered at the Motilal Nehru National Institute of Technology, Allahabad. He said that RBI expects global commodity prices will peak in 2011 which will provide some relief to domestic inflation scenario.

“In addition, there is an urgent need to address the issue of structural supply constraints, particularly in agriculture, so that these do not become binding constraints in the long-run hampering the task of inflation management,” he said.

While RBI’s medium term objective is to bring down inflation at 3 per cent, monetary policy aims to contain perceptions of inflation in the range of 4 – 4.5 per cent with a particular focus on non-food manufacturing or core inflation. “Going forward, both global and domestic factors will shape the inflation outlook. With increasing global integration, global commodity prices are having an increasingly significant influence on domestic prices,” he said.

The central bank has raised the key policy rate by 11 times in the last 16 months to tackle inflation which has stayed stubbornly high for more than a year now. In July RBI revised March end inflation projection at 7 per cent from 6 per cent projected in April.

According to RBI the current level of inflation is an amalgam of both supply constraints and demand pressures. “High inflation is the most regressive form of taxation, particularly on the poor. It is, therefore, important to contain inflation and keep inflation expectations anchored so that consumers do not mark up their long-run inflation expectations,” RBI said.