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Wages upsurge driving inflation: RBI

-The Financial Express

Mumbai: On Tuesday, the RBI said the path of inflation will be shaped by two sets of counteracting forces. On the downside, slower growth and excess capacity in some sectors will help moderate core inflation.

“Stable, or in the best case scenario, declining commodity prices will reinforce this tendency. An appreciating rupee will also help to contain inflationary pressures by bringing down the rupee cost of imports, especially of commodities. On the upside, persistent supply constraints may be aggravated as demand revives, resulting in price pressures. Rupee depreciation, which may result from global financial instability, will add to imported inflation,” RBI Governor D Subbarao said.

He said an important driver of inflation is the upsurge in both rural and urban wages, which is exerting cost-push pressures. Finally, as under-pricing in several products is corrected as part of the fiscal consolidation process, suppressed inflation is being brought into the open. As necessary a step as this is, it will result in higher inflation.

Although inflation has remained persistently high over the past two years, it is important to note that during the 2000s, it averaged around 5.5 per cent, both in terms of WPI and CPI, down from its earlier rate of about 7.5 per cent.

“It is, therefore, critical that even as the monetary policy stance shifts further towards addressing growth risks, the objective of containing inflation and anchoring inflation expectations is not de-emphasised,” Subbarao said.