Inflation remains cornerstone of monetary policy: RBI

Mumbai: The Reserve Bank on Thursday said inflation remains the cornerstone of its monetary policy action in the wake of a possible deficient monsoon which poses upside risks to price rise.

"Inflation control remains the cornerstone of the monetary policy as upside risks to inflation remain. This is largely due to unsatisfactory monsoons, large upward revision in MSPs (minimum support price) on the back of cost escalations and exchange rate depreciation during Q1 of FY13," the RBI said in its annual report for FY12 here.

In the first quarter review of monetary policy, the central bank had revised upwards its baseline projection for headline inflation in March 2013 to 7 per cent from 6.5 per cent, factoring in the upside risks to inflation.

"Persistence of inflation, even as growth is slowing, has emerged as a major policy challenge," the report said.

On the impact of high inflation on welfare, the report said poor households are unable to maintain the consumption levels at current prices and therefore, they are particularly worse off in an inflationary situation.

The growth slowdown in FY12 further reduced the welfare of the common man as firstly, it had adverse impact on employment and incomes and secondly, with low growth, the trickle down benefits for poor also reduced, it said.

While the country`s GDP growth slipped to 6.5 per cent last fiscal, inflation declined to 6.87 per cent in July.

Enumerating specific risks, the RBI said there could be considerable pressure on price of pulses, and edible oil among others, due to a deficient monsoon.

It said upside risks also arise from suppressed inflation to energy, especially diesel, electricity, coal and fertilizer, which need to be adjusted to contain risks.

The RBI said demand pressure from higher rural wages and corporate staff cost would have to factored in for inflation control. However, inflation outlook for 2012-13 remained better than the previous year.