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The Reserve Bank of India in its mid-term policy review stated that inflation will be higher than the initial forecast.
The central bank said that in absence of an appropriate policy reform wholesale price index (WPI)-based inflation will remain higher for the rest of the year.
"WPI inflation, which had eased in Q1 of 2013-14, has started rising again as the pass-through of fuel price increases has been compounded by the sharp depreciation of the rupee and rising international commodity prices", the central bank said.
The WPI inflation in July and August moved out of the RBI's comfort zone of 5% and stood at 5.8% and 6.1% respectively. In the first quarter, the inflation remained sub-5% in all the months.
The central bank also raised concern on the retail inflation, which it said has been increasing since few years and which in turn has led to a lackluster confidence among investors.
"What is equally worrisome is that inflation at the retail level, measured by the Consumer Price Index, has been high for a number of years, entrenching inflation expectations at elevated levels and eroding consumer and business confidence", said RBI.
However, good monsoon may ease some pressure on the retail inflation, the central bank added.
"Although better prospects of a robust kharif harvest will lead to some moderation in CPI inflation, there is no room for complacency," it added.
The Prime Minister's Economic Advisory Council (PMEAC) had in its economic outlook last week pegged the WPI-based inflation for this year to be at 5.5% against RBI's projection of 5%.
