RBI warns of suppressed inflation; rate cut likely
per cent. However, output gap may start closing in 2013-14 although at a slow pace on the back of some revival in investment and consumption demand.
Both weakening domestic demand and lower global commodity prices contributed to the softening of headline inflation, it observed. Though the recent hike in diesel prices will put some pressure on the overall price level, the near-term inflation outlook indicates that the moderation may continue through Q4 of 2012-13.
While the pressure from generalised inflation remains muted at the current juncture, risks from suppressed inflation, pressure on food prices and high inflation expectations getting entrenched into the wage-price spiral need to be reckoned with. “The inflation path for 2013- 14 could face downward rigidity as some of the risks from suppressed inflation materialise,” it said.
Growth remained below potential for the fifth successive quarter. “Policy initiatives of the government are yet to show up fully or definitively in data. Revival may take some more time. Quality of fiscal adjustment remains a concern, even as fiscal risks have reduced in 2012-13,” the RBI said.
Going forward, risks remain from suppressed inflation, pressure on food prices and high inflation expectations getting entrenched into the wage price spiral. “Wage inflation remains a source of concern. Rural wage inflation declined marginally but remained high at 18 per cent. In organised manufacturing, increases in staff costs remained in double digits,” it said.
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