Divergence between WPI and CPI inflation has widened: RBI

At the outset of the annual monetary policy schedule to release on 3 May at 11 AM, RBI has released Macro economic report for 2012-13.

The report raised the concern for higher CPI inflation. It said, In view of macro-financial risks that stay significant, headline inflation remaining above the threshold and consumer price inflation remaining high, the space for action for 2013-14 remains very limited. If some of the risks come to fore, policy re-calibration may become necessary in either direction. Headline inflation is likely to remain range-bound in 2013-14, with some further moderation in H1 due to subdued producers' pricing power and falling global commodity prices, before it increases somewhat in H2 largely due to base effects, report added further.

Reserve Bank's survey of outside professional forecasters shows anticipation of a modest recovery with growth in 2013-14 at 6.0 %from 5.0 %and average WPI inflation to moderate to 6.5 %from 7.3 per cent. Surveys show that inflation expectations have moderated slightly, while business expectations remain subdued.

Demand remained sluggish

Aggregate demand remained sluggish with inflation adversely impacting real consumption and cyclical and structural factors impeding investment. Investment decline was accompanied by decline in saving rate as persistence of inflation eroded financial savings of the households. Corporate sales growth moderated in Q3 of 2012-13 to its lowest level since Q3 of 2009-10. Operating profits grew at a positive rate.

CAD risks stay though fall in global commodity prices bring temporary respite

Modest pick-up in exports in Q4 of 2012-13 and some deceleration in imports are likely to help moderate current account deficit (CAD) in Q4 of 2012-13 after a record high of 6.7 %of GDP in Q3. Despite this, the CAD/GDP ratio for the year 2012-13 is expected to be around 5.0 per cent, twice the sustainable level.

Above all, inflation is remaining as a key concern. Divergence between WPI and CPI inflation has widened on account of higher food inflation and other factors such as increase in housing rents and transportation costs, RBI explained further.

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