RBI says inflation likely to top its estimates

India’s monetary authority Reserve Bank of India (RBI) said on Friday that inflation was rising faster than its anticipation and as a result by the fiscal end, rate of price increase could be much higher than what it projected earlier.

Wholesale inflation in India finally entered back into the positive territory after remaining in the red for thirteen weeks as the wholesale price index (WPI) registered a growth of 0.12% in the week ended Sept 5, further raising concerns regarding increasing inflationary pressure in the economy.

Deputy governor of the RBI K C Chakrabarty said after the release of the inflation figures that while the Bank had projected 5% inflation by March in its quarterly review of monetary policy, the same could in fact stand at 6% by that time. In its July review, the RBI had raised its fiscal end inflation projection to around 5.0% from around 4% given in April this year.

However, other economists are even more cautious of the rise in inflation and see the fiscal-end target even higher, primarily due to high food prices and failure of monsoon. India’s monsoon rains this season have been 20% below normal which is expected to result in at least 18 million tonne of decline in foodgrain production according to the planning commission. In this wake, the already high food inflation may further soar, sending ripple effects to the broader economy.

The business expectations survey conducted by the RBI in first quarter had reflected that inflationary expectations were well anchored in the economy. However, a recent survey released by the economy think tank National Council of Applied Economic Research (NCAER) showed that most respondents expected inflation touching 8% by end of March 2010.

Clearly, the inflation situation is becoming more volatile than anticipated by the apex bank and it would also have to do more to anchor inflation expectations in order to avoid another instance of runaway inflation similar to last year. The dilemma being faced by the RBI is that if it takes immediate steps to counter inflation and tackle expectations, it may hit the economic recovery through opposite impact on both the real interest rates and interest rate expectations in the economy. Only time would show what side RBI would choose, but at present, within and outside the RBI, opinion seems to be biased more in favour of erring on the side of inflation rather than hurting recovery.