Inflation at elevated levels

Inflation in the economy continues to remain at elevated levels. The WPI inflation for the month of May, which came in last week was placed at 7.55%. This is significantly higher than the RBI's comfort level.

Suppressed level of inflation could re-surface

Inflation has to an extent been suppressed and the RBI may have been worried that with the deregulation of diesel, there could be further spike in inflation. The petrol price hike which was affected towards the end of May also needs to get fully factored into prices.

Depreciating rupee

The fast depreciating rupee only adds to inflation, since it makes the cost of imported items, particularly fuel, more expensive.

Lack of fiscal consolidation on the part of the government

The RBI may have seen little intent on the part of the government for fiscal consolidation and deregulation of fuel (diesel) and LPG. The RBI must have felt that the government is doing little and expects it do a lot more. "You act and then we will" may have been the idea.

Rally in commodity prices

The Greece political situation, which ended favourably could spark a rally in commodities. The FOMC meet and signals of QE3 could also spark a rally in commodities, which could give a fresh impetus to inflation.

Under the circumstances, a "wait and watch" policy by the RBI has been the right approach.

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