'5-6% By Next June'

Why are we witnessing such sharp inflation despite various measures?

It is an external shock—due to demand-supply issues—that has to play through the economy. Our initial policy response was to adjust customs and excise duties, particularly in cases where sharp changes had taken place. These are one-time adjustments. Globally, supply shocks play through the system. In fact, my old colleague Martin Wolf has said that this is not really inflation but a one-time change in prices, in this case because of rise in price of crude and commodities. What the monetary and overall policy has to ensure is that this does not become inflation by giving rise to inflationary expectations and set up a spiral.

Has inflation peaked? When can we hope to return to single-digit inflation?

My forecast is that by June 2009, given various monetary measures and appropriate management, we will be back to normal 5-6 per cent inflation levels. At this point in time, as there does not seem to be any end to rise in oil prices, the inflation rate is heavily dependent on that. All countries, including India, which are net oil importers are affected. To a substantial extent, the immediate future depends on these external commodities’ price shifts. There is evidence of peaking in some of these commodities. If the downward trend gets established and if crude oil peaks, then there can be some early decline in inflation.