RBI hikes FY10 inflation forecast

Keeping in view the global trend in commodity prices and the domestic demand-supply balance, WPI inflation for end-March 2010 is projected at around 5%, the Reserve Bank of India (RBI) said on July 28. This is higher than the projection of 4% made in the Annual Policy Statement of April, the central bank said while announcing the first quarter review of the annual monetary policy.

On a financial year basis, WPI inflation has already increased by 3.5% by July 11, the RBI said. The base effect, which is generating the negative WPI inflation, is projected to completely wear off by October, it added. Thereafter, the year-on-year WPI inflation will creep up even without any major supply shock, the RBI said.

The immediate challenge is to manage the balance between the short-term compulsions of providing ample liquidity and the potential build-up of inflationary pressure on the way forward, the RBI said. The task is to maintain the accommodative monetary stance till demand conditions further improve and the credit flow takes hold, but to be ready with a roadmap to reverse the expansionary stance quickly and effectively thereafter, the RBI said.