Active demand-side management needed to check inflation: RBI

Medium-term inflation management to ease supply constraints in key sectors.

High and persistent inflation at the current juncture posed a number of challenges, the Reserve Bank of India (RBI) said in its annual report on Tuesday. The increasing generalisation of inflation shows the emergence of inflationary pressures from the demand side, which will require active demand management policies in the near term.

“High inflation, when persists, could not only dampen overall growth prospects of the economy but also hamper the progress on inclusive growth,” RBI said in its annual report. Inflation could induce distortion in resource allocation and possible decline in domestic savings, the central bank said.

RBI added: “Uncertainty associated with inflation could complicate investment and consumption planning, affecting capital accumulation and savings. Inflation at times could also shift the focus from production activities and productivity enhancing investment to speculation and hoarding.

The focus of medium-term inflation management, however, must be to ease supply constraints in key sectors, where demand would continue to grow, the central bank said in its annual report. This is particularly important for agricultural products, it said. It also needs to be recognised that high and generalised inflation, if persists, in itself is a risk to growth through its unfavourable effects on resource allocation as well as unfavourable redistributive effects on the poor.

The central bank raised its inflation projection to six percent by the end of financial year on March 31, compared with 5.5 per cent projection it made in its annual policy in April. Inflation in the first three months of the current financial year remained in double digits, rising by one percentage point each month compared with provisional figures. The measure declined to 9.97 percent in July, despite some moderation in prices of food products, the central bank said.

The evidence of inflation persistence in India in the recent period suggests that despite the risk of possible trade off between growth and inflation in the short-run, inflation containment may have to receive precedence over other policy objectives in India for the Reserve Bank.