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Shifting its stance of monetary policy towards targeting retail inflation as it is an "inequitable tax", RBI today said it may exceed 8 per cent by March end and efforts will continue to bring it down.
On the rate hike by 0.25 per cent in policy review today, RBI Governor Raghuram Rajan said it will set the economy securely on the disinflationary path.
The RBI's Macroeconomic and Monetary Developments report released today said that over the next 12 months retail inflation will continue to remain over 8 per cent level.
Retail or CPI inflation in December moderated to a three month low of 9.87 per cent, while the wholesale or WPI was at 5-month low of 6.16 per cent during the month.
The RBI said the upside risks to inflation in 2014-15 arise from likely upward revisions in domestic energy prices and growth acceleration.
Highlighting that the elevated levels of inflation erode household budgets and constrict the purchasing power of consumers, Rajan said: "the so-called trade-off between inflation and growth is a false trade-off in the long run".
There have been demands from various quarters that the RBI should look at relaxing interest rates as inflation was showing signs of easing and slowdown persisted in industrial output.
"Inflation is also a tax that is grossly inequitable, falling hardest on the very poor. It is only by bringing down inflation to a low and stable level that monetary policy can contribute to reviving consumption and investment in a sustainable way," Rajan said.
A committee headed by Urjit Patel had last week recommended that the RBI should aim to bring down retail inflation to 8 per cent by January 2015, and to 6 per cent by January 2016.
Rajan said growth is likely to lose momentum in the third quarter of 2013-14. The data for Q3 GDP is scheduled to be released on February 28.
Growth in first half of 2013-14 stood at 4.6 per cent. In order to record a 5 per cent growth in the full fiscal, the economy has to expand by 5.4 per cent in second half.