The Reserve Bank on Friday said economic slowdown is contributing to decline in prices, but warned that inflation could bounce back on account of supply-demand mismatch.
The RBI in its mid-quarterly review, however, hinted at rate cuts in future. It had increased rates 13 times since March, 2010, to tame inflation. The central bank on Friday kept its key policy rates unchanged.
"From this point on, monetary policy actions are likely to reverse the cycle, responding to the risks to growth," it said.
The central bank said deceleration in growth is contributing to a decline in inflation momentum which is also being helped by softening food prices.
"However, it must be emphasised that inflation risks remain high and inflation could quickly recur as a result of both supply and demand forces," it said.
Though, reassuringly, inflationary pressures are expected to abate in the coming months, RBI said that both inflation and inflation expectations are currently above the comfort level of the Reserve Bank.
On annual basis, headline WPI inflation moderated to 9.1 per cent in November from 9.7 per cent in October, driven largely by decline in primary food articles inflation.
Food inflation fell to a four-year low of 4.35 per cent as on December 3.
The RBI has retained its year-end inflation projection at 7 per cent.
"With moderation in food inflation in November 2011 and expected moderation in aggregate demand and hence in non-food manufactured products inflation, the inflation projection for March 2012 is retained at 7 per cent," it said.
The apex bank will make a formal assessment of its inflation projections for 2011-12 in the third quarter review of January 2012.