Reserve Bank on Tuesday cautioned that rupee depreciation will have adverse impact on prices of fuel and manufactured products in the coming months even as it aims to keep inflation at 5 per cent by March end.
The stronger than expected monsoon has not yet softened food inflation as much as it should have and in particular, vegetable prices have been impacted by weather-driven supply disruptions, said RBI Governor D Subbarao while unveiling the first quarter monetary policy review.
While the outlook for global non-oil commodity prices remains benign, international crude oil prices are firming up.
"The sharp depreciation of the rupee since mid-May is expected to pass through in the months ahead to domestic fuel inflation as well as to non-food manufactured products inflation through its import content," Subbarao said.
The timing and magnitude of the remaining administered price revisions are a source of uncertainty
for the inflation outlook, he said.
The monetary stance, he said, is intended to guard against ‘re-emergence of inflation pressures’ among other factors.
"Keeping in view the domestic demand-supply balance, the outlook for global commodity prices, and on the expectation that spatial and temporal distribution of the monsoon during the rest of the season will be normal, the RBI will endeavour to condition the evolution of inflation to a level of 5 per cent by March, using all instruments at its command," he said.
WPI inflation edged up slightly to 4.9 per cent in June 2013 and retail inflation surged close to double digits.
Subbarao said an environment of low and stable inflation and well-anchored inflation expectations is necessary to sustain growth in the medium-term.
"Without policy efforts to address the deterioration in productivity and competitiveness, the pressures from wage increases and upward revisions in administered prices could weaken growth even further and exacerbate inflation pressures," he said.