The Reserve Bank of India (RBI) expects the price situation to improve in the third quarter.

Retail inflation, or inflation based on the consumer rice index (CPI), stood at 6.26 per cent June which is above the 6-per-cent tolerance level of the RBI for the second month in succession with inflation at 6.3 per cent in May.

With a firm crude oil price, the apprehension in the markets is that inflation is likely to stay elevated.

However, the RBI in its latest monthly report on the state of the economy has pinned its hopes on the kharif crop to temper prices.

The central bank said that while inflation ruled above the tolerance range during June-November 2020 and moved above the upper bound in May and June, the “sense is that inflation will persist at these elevated levels for some months before easing in the third quarter of 2021-22 when the kharif harvest arrives in markets’’.

The RBI pointed out that the pick-up in inflation was driven largely by adverse supply shocks because of the disruptions caused by the pandemic. There are also specific demand-supply mismatches as in the case of protein-rich food items, edible oils and pulses, which are being addressed by supply side measures.

“Elevated international commodity prices, especially of crude, are also imparting cost-push pressures. These factors should ease over the year as supply side measures take effect,” the RBI said.

“Furthermore, a solid increase in aggregate demand is yet to take shape. Even with a 9.5 per cent GDP growth in 2021-22, there will be substantial slack in the economy and demand pressures may take some more time to become evident,” it observed.

Higher deficit

Veteran banker K.V. Kamath said on Friday that it is time for the Centre to become ‘‘brave’’ and stretch the fiscal deficit target it set for itself in this year’s budget.

He said benign interest rates of under 8 per cent and abundant liquidity are also necessary to seize what he called as a 25-year growth runway opportunity awaiting the country. Kamath was speaking at an event in Mumbai organised by the IMC Chamber of Commerce.

The government has targeted to get the fiscal deficit at 6.8 per cent for 2021-22 in the budget.