Policy action needed to fill demand-supply gap: RBI

Wholesale Price Index based inflation fell to 7.18% in December from 7.74% over the same period a year ago

The Reserve Bank has said that policy interventions are necessary to bridge the demand-supply gap and bring down inflation on a sustained basis.

"In order to bring inflation down on an enduring basis and anchor inflation expectations there is a need for policy action on several fronts.

"...It is important to aim for nutritional security not only to harness the demographic dividend stemming from our sizable young population but also to contain food prices. This will require addressing the supply-demand imbalance in the agricultural sector and modernising the supply chain," Reserve Bank Executive Director Deepak Mohanty said during an event recently.

Wholesale Price Index (WPI) based inflation fell to 7.18% in December from 7.74% over the same period a year ago. However, it is much above the comfort level of RBI.

"The Reserve Bank's technical assessment suggests that the threshold level of inflation for India is in the range of 4 to 6%. If inflation persists beyond this level, it could lower economic growth over the medium-term," he said.

He stressed to increase the depth of financial markets as well as calibrating monetary policy with growth-inflation dynamics.

"... While persevering with the steps to increase the depth of the financial market and addressing credit constraints, monetary policy needs to be calibrated to the evolving growth-inflation dynamics so that we move towards our potential growth in a non-inflationary manner," Mohanty said.

On fiscal consolidation, he said it is important to maintain both domestic and external balance to avoid the risks of twin deficits.

Further he said India needs to have a reliable power supply as well as availability of industrial raw materials to ensure industrial capacity utilisation and productivity improvement.

"Besides moderating inflation, this will also reduce reliance on imports of products for which domestic capacity exists," he added.

Among others, he said maintaining exchange rate stability to cushion transmission of international price pressures in commodities, particularly crude oil is also important.

"This will require management of the current account in our balance of payments with the rest of the world at sustainable levels," he said.