RBI vows to continue inflation battle; says upside risks persist

The Reserve Bank of India (RBI) on Thursday said the upside risks to inflation, which has been the focus of its monetary policy, still persist on account of factors including high vegetable prices and potential risks emerging from revision in the administered prices.

In its August bi-monthly policy, the Reserve Bank of India (RBI) kept its key policy rate unchanged, drawing comfort from a gradual easing in the inflation numbers. The RBI has said it aims to ease retail inflation to 8 percent by January 2015 and 6 percent by early 2016.

“Subsequent data release in terms of a higher consumer price index (CPI) inflation driven by vegetable price spike indicate that the upside risks to this assessment persist,” the RBI said in its annual report on Thursday.

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The retail inflation number rose to 7.96 percent in July from 7.46 percent in June, and was largely on account of fruits and vegetable items (which increased by 22.48 percent and 16.88 percent respectively).Core inflation stood at 7.4 percent.

Though some moderation in CPI excluding food and fuel inflation is visible in recent months, the extent of moderation warranted by the significant growth slowdown is yet to manifest in CPI, RBI said.

“Such rigidity in the core component of inflation points to the inertial nature of inflation feeding into the elevated inflation expectations, which would necessitate credible anti-inflationary monetary policy to provide a nominal anchor and break the inflation persistence,” RBI said in the report.

Food inflation in July rose to 9.36 percent as against 7.97 percent in June. On the other hand, industrial production fell to 3.4 percent in June from 4.7 percent in May.

The central bank, however, said the economy is on course to achieve the inflation target in 2014-15.

“While inflation trends during the rest of 2014-15 will also be conditional on several risk factors and the timing and extent of further revisions in administered prices, the inflation projections for 2014-15 remain in reach,” RBI said.

The RBI is set to announce its next monetary policy review on 30 September.