The Reserve Bank on Wednesday projected inflation to come down below the upper threshold level of 6 per cent by March quarter of the current fiscal.
RBI Governor Shaktikanta Das said the central bank will keep 'Arjuna's eye' (focus) on the evolving inflation dynamics and will remain 'nimble and flexible' to deal with the price situation.
Global commodity prices, including crude oil, have undergone some downward correction, but uncertainty continues to surround the near-term outlook in view of the prolonging geo-political hostilities.
Moreover, the resurgence in domestic services sector activity could also lead to price increases, especially as firms pass on input costs.
"Taking into account these factors and assuming an average crude oil price (Indian basket) of $100 per barrel, headline inflation is projected at 6.7 per cent in 2022-23, with Q3 (October-December) at 6.6 per cent and Q4 (January-March) at 5.9 per cent," the RBI said.
The Reserve Bank has the mandate of keeping inflation under 4 per cent, with a band of (+/-) 2 per cent.
Retail inflation has remained above the upper band of 6 per cent for 10 months through October as the Russia-Ukraine war led to supply chain disruption.
Saying that the risks are evenly balanced, the RBI said the consumer price index (CPI) or retail inflation for first and second quarter of next fiscal is projected at 5 per cent and 5.4 per cent respectively, on the assumption of a normal monsoon.
The pressure points from high and sticky core inflation and exposure of food inflation to international factors and weather-related events do remain.
"While being watchful of the impact of our earlier monetary policy actions, we will keep Arjuna's eye on the evolving inflation dynamics and be ready to act as may be necessary.
"Our actions will be nimble and in the best interest of the economy.
"The aspect of growth will obviously be kept in mind," Das said.
The Reserve Bank on Wednesday hiked key interest rates by 35 basis points to 6.25 per cent.
Going forward, food inflation is likely to moderate with the usual winter softening and the likelihood of a bountiful rabi harvest, but pressure points remain in the form of prices of cereals, milk and spices in the near-term.
Risks from adverse weather events add to uncertainty in the outlook.