Reserve Bank of India (RBI) Governor Shaktikanta Das on Thursday warned that India's headline inflation is expected to remain elevated during the second quarter (July-September) of the current fiscal year and may subside thereafter. The monetary policy committee (MPC) of central bank left the repo rate and other key policy rates unchanged at existing levels taking stock of recent rise in consumer inflation. Mr Das, however, did not give any range on inflation expectations. RBI has set the medium-term target for consumer price index (CPI) inflation or retail inflation of 4 per cent within a band of +/- 2 per cent, while supporting growth.
"Volatility in financial markets and rising asset prices also pose upside risks to the outlook. Taking into consideration all these factors, headline inflation may remain elevated in Q2:2020-21, but may moderate in H2:2020-21 aided by large favourable base effects," as per RBI's Monetary Policy Statement.
Domestic food inflation remains elevated across most economies since the onset of the pandemic, Mr Das said in his statement while unveiling the central bank's bi-monthly monetary policy review.
"A more favourable food inflation outlook may emerge as the bumper rabi harvest eases prices of cereals, especially if open market sales and public distribution offtake are expanded on the back of significantly higher procurement," as per the policy review by the six-member MPC.
Nonetheless, upside risks to food prices remain, he said, adding that the abatement of price pressure in key vegetables is delayed and remains contingent upon normalisation of supplies. Protein-based food items could also emerge as a pressure point. Higher domestic taxes on petroleum products have resulted in elevated domestic pump prices and will impart broad-based cost push pressures going forward, Mr Das said further.
The RBI takes into account retail inflation as a key input while arriving on its monetary policy decisions every two months. In the previous policy review in May, RBI had expected that favourable base effects, among others factors, may pull down headline inflation below target in Q3 and Q4 of 2020-21.