Inflation beyond tolerable limit: RBI

The RBI, which aims for 7 per cent inflation by the fiscal year-end, said the immediate challenge was to bring down inflation to a tolerable level as soon as possible. “As the inflation rates have hardened beyond tolerable levels, monetary policy would continue to address aggregate demand pressures, which appear to be strongly in evidence,” the RBI said in its Annual Report for 2007-08.

At a time of persistent inflationary pressures, this posed “severe challenges to monetary management”. “Thus, there is a need to ensure that the effectiveness of monetary policy is not diluted by fiscal expansion,” it said.

The RBI’s objective would be to bring down the prevailing intolerable level of inflation, now at 12.40 per cent, to a tolerable level of below 5 per cent as soon as possible and around 3 per cent in the medium-term, it said. There were some downside risks to growth and upward pressures on inflation in the near-term. But the prospects in the medium and long-term term continued to be robust for the economy, the RBI said.

There was a need to persist with reforms in all sectors to realise the full potential of the economy, RBI said.

It warned the Government might have to raise fuel prices again and said government finances might come under pressure due to higher subsidy costs, a waiver of loans to small farmers and a sharp hike in salaries of government employees.