Inflation rate could touch double-digit level in March but would start declining from April onwards, chief economic advisor Kaushik Basu said on Thursday. The wholesale price index-based inflation stood at 9.89% in February.
Basu said inflation rate for March, which will be released in mid-April, would be ‘close to 10%.’ ?After that I expect it to come down in April, May and June, with some fluctuations and thereafter there would be a steady decline,? he said.
Basu, however, hastened to add that these projections were contingent upon a good monsoon and global variables such as the oil prices remaining along expected lines. At the moment, the price of oil futures is about $2 higher that the spot price, he said.
Inflation has already surpassed the Reserve Bank of India?s comfort level of 8.5% rate by March-end, with food inflation particularly a worry for the people and the government. Despite decline in the prices of key vegetables such as onion and potato, the food inflation rose marginally to 16.35% during the week ended March 20 from a four month low of 16.22% in the previous week, mainly because of rise in prices of milk and pulses.
When asked whether the RBI would raise interest rates further to combat rising inflation, Basu said: ?I don?t know. A central bank would usually look at if inflation is across-the-board?that?s when the Reserve Bank usually steps in.? What the Reserve Bank does in April will depend upon the March inflation numbers, he said, speaking to a select group of journalists. Analysts expect another interest rate hike when the RBI reviews its monetary policy on April 20, with its focus firmly on anchoring inflationary expectations as stronger signs emerge the economy is on a steady growth path. ?India is not yet a credit-strapped economy. So that action of the RBI (to raise repo and reverse repo rate by 25 basis points last m onth) was safe,? Basu pointed out.
He added that monetary tightening cannot be an immediate solution for reducing inflation. ?Monetary tightening has an effect on the inflation with the longest gap of between 6 and 18 months,? Basu said.
He said a central bank cannot tighten the monetary policy at once as it could adversely affect employment and demand in the economy. ?If money supply is tightened massively then you bring inflation immediately down but it leads to unemployment,? he said.
The government was keen on lowering the fiscal deficit to 5.5% this fiscal from 6.7% in the previous year as it would help in combating inflation. ?The view in the government is that you want to rollback the fiscal stimulus. You don?t want to do it sharply or suddenly. We have taken some action and that has been appreciated by the rating agencies,? he said. Credit rating agency Standard & Poor?s has recently raised India?s sovereign rating outlook to stable from negative.