RBI ups March-end inflation projection to 7.5%

"The baseline projection for headline WPI inflation for March 2013 is raised to 7.5 per cent from 7 per cent indicated in July... The persistence of inflationary pressures, even as growth has moderated, remains a key challenge," RBI said in the Second Quarter Review of Monetary Policy 2012-13.

The WPI inflation for September rose to 7.81 per cent, from 7.55 per cent in August.

The RBI said that despite recent moderation, global commodity prices remain high. But geopolitical developments could further flare up prices and induce inflationary pressure.

"Domestic prices of administered petroleum products do not reflect the full pass-through of global commodity prices and under-recoveries persist. While corrections are welcome from the viewpoint of overall macro-economic stability, their second round effects on inflation will have to be guarded against," RBI said.

The government in September hiked diesel prices by over Rs 5 a litre. While this has fuelled inflation in short-term, it will help the government to better manage its subsidy bill.

The RBI said inflation is expected to rise somewhat in the October-December quarter, before easing in the January- March period.

"As inflation eases further, there will be an opportunity for monetary policy to act in conjunction with fiscal and other measures to mitigate the growth risks and take the economy to a sustained higher growth trajectory," it added.

The RBI said that while above 5 per cent core inflation is a concern, food inflation will depend on how well the supply side issues are addressed. Food inflation in September stood at 7.86 per cent.