The Reserve Bank of India (RBI) said on Thursday that food prices will remain at a higher level despite average inflation in the country expected to moderate to around 5.5 per cent in fiscal year 2013-14.
"We see food prices continue to remain high, partly because income levels have gone up. Increasing real informal wages has been a major drive of inflation," RBI executive director Deepak Mohanty said in Guwahati.
"We have higher inflation. We are also a developing nation and so it's good to have some amount of inflation," Mr Mohanty said.
He was in the city to deliver a lecture on monetary policy at a programme organised by Gauhati University.
Many countries, including Japan, are having deflation and they are trying to go back to an era of inflation.
"We expect inflation will moderate to around 5.5 per cent this fiscal and growth will be 5.7 per cent, which will be much lower than the potential rate of 7 per cent," Mr Mohanty said while talking about RBI's projections.
Inflation is projected to come down to around three per cent in the medium term, he said adding demand pressure from fiscal deficit are significant and a major concern.
"Post crisis fiscal stability is an issue because if it is in the doldrums we can't achieve growth. We have taken financial stability as our objective," he added.
RBI adviser (monetary policy department) B K Bhoi said global prices of crude, food and metals are still at elevated levels and have an impact on Indian economy.
Asked to comment on India Inc's continuous demand to cut rates to ease lending cost, Mr Mohanty said, "Yes investments have come down and interest rate is one factor, but not the only factor for this."
"There are many other factors for this such as supply constraints, lack of infrastructure and high cost of production," he added.
He, however, declined to comment when asked if the RBI would take a decision to lower interest rates in its policy review later this month.
Last month, RBI governor D Subbarao had said the apex bank would take into account the falling inflation while deciding on policy initiative in its mid-quarter review of monetary policy for 2013-14 on June 17.
A 0.25 per cent reduction in the lending rates is being eyed by market analysts considering a slew of factors, including fall in growth to a decade low of 5 per cent and a more-than-expected improvement in fiscal deficit to 4.9 per cent last fiscal year against a projected 5.2 per cent.
Besides, while core inflation is under 3 per cent, headline price index has slipped below 5 per cent in April.
There is also a downward trend in consumer inflation which has fallen below 10 per cent.
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