Mumbai: India’s headline inflation is not easing as fast as the central bank would like it to and upside risks remain, Subir Gokarn, a deputy governor at the Reserve Bank of India (RBI) said on Wednesday.
India’s headline inflation eased in line with expectations to 7.48% in November, its lowest level in a year.
However, food inflation, which has a weightage of nearly 15% in the wholesale price index, has accelerated for two consecutive weeks snapping a seven-week easing trend.
Gokarn said food prices were falling but not as fast as RBI would like them to.
“Downside risks to growth are abating and upside risks to inflation are increasing. So that is the balance that we are now focusing on in terms of potential action,” Gokarn said.
To add to the government’s woes, onion prices have shot through the roof, a development which is sure to feed into the weekly food inflation figures.
Indian state-owned oil marketing firms have already raised prices of petrol sold in India and there is talk of a hike in diesel prices soon.
If that comes through, it would lead to a spike in inflation, putting the central bank’s end-March projection of 5.5% at risk.
Gokarn also warned that another threat to moderating inflation was high global commodity prices, which had been flagged by the RBI in its December policy review.
While tight liquidity conditions have aided better monetary policy transmission, the central bank recently introduced cash-easing measures, including a bond purchase worth Rs48,000 crore, to support a cash-starved market.
Gokarn said the measures would help bring back the liquidity situation into its comfort zone over time. He had earlier said the central bank was comfortable with cash in surplus or deficit of 1% of deposits, which is about Rs50,000 crore.
“We do have a trajectory which will take the liquidity situation close to the 1% boundary as we go along. Obviously that is something we expect to happen over a period of time. It is not something we expect to see overnight.”
The deputy governor said there was a mismatch between the rate of growth of bank credit and deposit mobilisation, which has made the liquidity deficit persistent in nature. Official data from the Indian central bank showed that bank loans rose 23% on year as of 3 December, while deposits were up 15% from a year earlier.