High and persistent risk inflation increases risk of exchange stability: RBI

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High and persistent risk inflation increases risk of exchange stability: RBI
High and persistent inflation also increases the risks of exchange rate instability, the RBI said in its Monetary Policy Review Statement released today.

The RBI which kept policy rates unchanged today remained worried on the inflation front. "High inflation at both wholesale and retail levels risks entrenching inflation expectations at unacceptably elevated levels, posing a threat to growth and financial stability," India's central bank noted.

"Recent readings suggest that headline inflation, both retail and wholesale, have increased, mainly on account of food prices. While CPI and wholesale price index (WPI) inflation excluding food and fuel have been stable, despite a steady and necessary increase in administered prices towards market levels, the high level of CPI inflation excluding food and fuel leaves no room for complacency.

There is, however, reason to wait before determining the course of monetary policy. There are indications that vegetable prices may be turning down sharply, although trading mark-ups could impede the full pass-through into retail inflation. In addition, the disinflationary impact of recent exchange rate stability should play out into prices. Finally, the negative output gap, including the recent observed slowdown in services growth, as well as the lagged effects of effective monetary tightening since July, should help contain inflation," the RBI has said.


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