RBI raises March ’12 inflation projection to 7 per cent

He also said the current trends in money supply (M3) and credit growth remain above the indicative trajectory of the RBI. Keeping in view the evolving growth-inflation dynamics,it has revised downwards the indicative projection of M3 growth for 2011-12 from 16 per cent,as set out in the May 3 Policy Statement,to 15.5 per cent. “Non-food bank credit growth projection has also been revised downwards from 19 per cent to 18 per cent,” he said.

“In our May 3 Policy Statement,we indicated the upside risks to the inflation outlook. Some of the upside risks have since materialised. These include: the upward revision in prices of petroleum products; the significant increase in the minimum support prices (MSPs) for some agricultural commodities; and the persistence of non-food manufactured products inflation at elevated levels reflecting underlying demand pressures,” he said.

“The RBI has revised its inflation projections and credit growth. While these revisions may be taken as realignment of targets given the current economic scenario,it is important to note that 7 per cent inflation by any standard is high as a projection. This confirms that inflation has become systemic and no short-term solutions exist. It is likely that further rate hikes may occur in the future if headline inflation continues to remain stubborn,” said Anis Chakravarty director,Deloitte,Haskins & Sells.

What factors will shape the inflation outlook going forward? “Let me indicate the important ones. The first factor will be the overall performance of the south-west monsoon; both its spatial and temporal distribution will be important. The second factor will be crude oil prices whose outlook for the near future is uncertain. Going by the recent trend,the price of oil could remain volatile because of the pace of global recovery,liquidity conditions,and importantly,the overall oil supply situation,” Subbarao said.

Subbarao’s assessment

Inflation: Near-normal monsoon may not ease pressure on food inflation further due to increases in wage costs and support prices. These trends necessitate structural reforms to enhance supply response,while the anti-inflationary bias of monetary policy anchors inflation expectations

Global Situation: Globally,the momentum of recovery appears to be stalling. High oil and commodity prices,the Middle East political strife,Japan earthquake,sovereign debt problems and the impasses on the fiscal and debt problems in the US have taken a toll on economic activity as well as consumer confidence

Growth: Inflation risks stay,while growth showed signs of moderation. On current reckoning,growth is likely to stay around trend growth of around 8 per cent. However,downside risks have increased

Strategy: Considering the persistence of inflation above the comfort level of the Reserve Bank,and based on the premise that high inflation is inimical to long-term growth,the RBI has persevered with its anti-inflationary stance in 2011-12