Further softening of vegetable prices is unlikely and the impact of the El Nino weather phenomenon on the monsoon could have an adverse bearing on inflation, the Reserve Bank of India said on Tuesday.
"Vegetable prices have entered their seasonal trough and further softening is unlikely. . .There are risks to the central forecast of 8 per cent CPI inflation by January 2015 stemming from a less-than-normal monsoon due to possible El Nino effects," the RBI said in its first bi-monthly monetary policy statement for 2014-15, which left interest rates unchanged.
Wholesale price-based inflation eased to a nine-month low of 4.68 per cent in February, while retail inflation slowed to a 25-month low of 8.1 per cent.
"Excluding food and fuel, however, retail inflation remained sticky at around 8 per cent.
“This suggests that some demand pressures are still at play," it added.
El Nino refers to the warmer-than-average sea surface temperatures in the central and eastern tropical Pacific Ocean.
This condition occurs every four to 12 years and had last hit India's monsoon in 2009, leading to the worst drought in almost four decades.
Other risks to inflation are uncertainty on minimum support prices for agricultural commodities and other administered prices, especially of fuel, fertiliser and electricity, the outlook for fiscal policy, geo-political
"The Reserve Bank's policy stance will be firmly focused on keeping the economy on a disinflationary glide path that is intended to hit 8 per cent CPI inflation by January 2015 and 6 per cent by January 2016," it said.
It said at the current juncture, it is appropriate to hold the policy rate, while allowing rate increases undertaken during September 2013-January 2014 to work their way through the economy.
"If inflation continues along the intended glide path, further policy tightening in the near term is not anticipated at this juncture," RBI said.
RBI Governor Raghuram Rajan said there is still uncertainty over the actual impact of El Nino on the June-September monsoon and agriculture output.
"It's not a given that El Nino will happen and it's not a given that food production plummets.
“If food production plummets, it is not a given that inflation across the board will be high. . .I don't think at this point we can anticipate precisely what will happen," Rajan said.
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