Reserve Bank of India warns on sustained inflation risk

The Reserve Bank of India (RBI) said inflation may stay high for longer than anticipated earlier due to a rise in global commodities prices and domestic supply side pressures that have recently pushed up food prices. 

"Upside risks to inflation have increased, suggesting the need for sustained anti-inflationary policy focus," the RBI said in a report a day before its quarterly monetary policy review, when it is widely expected to raise interest rates by at least 25 basis points.

"Since a lower inflation regime is essential for sustainable high growth, containing inflation becomes the dominant policy objective in the current environment," the report said.

After raising rates six times since March to tame inflation, the central bank paused in December but indicated further rate hikes were possible, with inflation remaining well above its comfort zone.

"As a result of newer factors and increased risks, the inflation trajectory is likely to show some persistence and moderate only gradually," Monday's report said.      

A sharp rise in food prices, a key driver of inflation in India, has been putting upward pressure on broader prices.                                           

The wholesale price index , the most widely watched gauge of prices in the country, rose 8.43 percent in December from a year earlier, compared with 7.48% in November and well above the RBI''s March-end projection of 5.5%. 

The RBI's perceived comfort zone for inflation is 5-6 percent in the short term and 3-4 percent in the medium term.