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“We expect moderation in inflation only in the last months of this year. Headline WPI (Wholesale Price Index) monthly inflation is likely to remain relatively ‘sticky’ and persistently high between August-December, 2011,” a Finance Ministry note said.
Inflation stood at 9.44 per cent in June, much above the Reserve Bank’s (RBI) comfort level of 5-6 per cent. The current inflation, the note added, is being mainly driven by “seasonal effects and upward movement in crude oil, manufactured and administered fuel prices...”
The government, it said, “is working closely together with the RBI to take all appropriate steps to reduce inflation to a more comfortable level. While there is no clear cut definition of tolerance for inflation, we would like to bring headline inflation down to 6-6.5 per cent in the near term.”
The RBI has increased key interest rates ten times since March 2010, to check rising prices and it is widely expected to announce another rate hike at its quarterly monetary policy review on July 26.
The ministry expects inflation to moderate to 6-7 per cent by March, 2012.
On the concerns about overheating of the economy, the paper said, “We are in a tightening mode on both fiscal and monetary front, that should reduce whatever elements of demand side pressure there may be.” Moreover, it said, easing of supply constraints would help reduce inflationary pressure.
Justifying the recent hike in diesel, kerosene and LPG prices, it said failure to do so would have led to widening of fiscal deficit and further fuelling of inflation. “Our preferred approach is to increase prices only gradually, as you have seen during the past, while protecting the poor through direct income raising support such as MNREGA and more targeted subsidies,” it said.
In its annual monetary policy for 2011-12, the Reserve bank, too, had said that inflation would remain elevated for some time and average 9 per cent during the first half of the fiscal before moderating to around 6 per cent by March, 2012.
