As per the Economic Survey for 2016-17, the retail inflation is likely to be well below RBI's target of 5 per cent in the current fiscal as demonetisation would discourage any price headwind.
The new inflation targeting approach by the Monetary Policy Committee (MPC) and gains from macro-economic stability will help India consolidate gains on price control, meaning prices will be less susceptible of individual whims and caprice of governments, the Survey said.
"The outlook for the year as a whole is for CPI inflation to be below the RBI's target of 5 per cent, a trend likely to be assisted by demonetisation," said the Economic Survey presented in Parliament by Finance Minister Arun Jaitley.
In the current fiscal so far, retail inflation stabilised around 5 per cent, while wholesale price-based inflation averaged around 2.9 per cent during April-December.
"Codified the institutional arrangements on monetary policy with the Reserve Bank to consolidate the gains from macroeconomic stability by ensuring that inflation control will be less susceptible to the whims of individuals and the caprice of governments," it said.
The six-member MPC with three members outside of the Reserve Bank has been a deviation from the old practice when policyrate setting was a sole discretion of RBI.
The Survey pointed out inflation is being driven by narrow group of food items in which pulses are major contributor of food inflation in the country.
According to the Survey, the Indian economy has continued to consolidate gains achieved in restoring macroeconomic stability.
During April-December, retail inflation averaged 4.9 per cent and displayed a downward trend since July when it became apparent that kharif agricultural production in general, and pulses in particular would be bountiful, it said.
"Decline in pulses prices has contributed substantially to decline in CPI (consumer price index) inflation which reached 3.4 per cent at end-December."