RBI governor D Subbarao on Thursday warned of upside risks to inflation and expressed concerns over the countrys high current account deficit (CAD), denting hopes for rate cuts and sending bond yields to a two-week high and rupee to a 10-month low.
He said inflation is still high and monetary policy needs to contain inflation expectations. Imports, especially crude oil and gold have increased and exports, on the other hand, have slowed down.
He said imported inflation becomes a risk when rupee weakens, bringing balance of payment (BoP) under stress and showing strain on current account deficit.
Expressing concern over high retail inflation, he said steps need to be taken to tame cyclical food inflation. Consumer price index (CPI), which has shown a falling trend, is still high at 9.39%. There are certain factors like sectoral imbalances...we have the highest fiscal deficit as compared with emerging economies. Our external sector problem is large current account deficit, he added.
He further added that several upsides to inflation still remain. Growth has significantly moderated, inflation is somewhat off its peak, but there are several upside risk factors, the balance of payments is under stress and investments have to pick up, Subbarao said.
Weakening commodity prices had bolstered hopes of easing pressure both on the current account deficit aznd inflation, although Subbarao warned against complacency.
Global prices, especially commodity prices, certainly softened in the last few months. But we cannot take the soft prices for granted, Subbarao said.