Manmohan great as FM but not as PM : Arun Jaitley ( FM, 2016)

Reserve Bank of India Governor Raghuram Rajan may have raised a quiet toast with his colleagues on Friday evening after retail inflation data showed the central bank had met its January 2016 target of slowing the price gains to under 6 per cent.

The satisfaction would be understandable given that the RBI had less than a year ago — at the end of February 2015 — entered into a historic agreement with the government on an inflation targeting monetary framework with clear and specified goals and timelines.

The first target of limiting retail inflation to 6 per cent or below by January 2016 has now been met, with the government reporting CPI data that showed the headline number at 5.59 per cent. While the reading is a 17-month high, it has slowed considerably from the 11.15 per cent recorded in November 2013.

It's the journey ahead to the next milestone of 5 per cent by March 2017 which is likely to challenge monetary policy makers. The target agreed by the government and the central bank is for inflation of 4 per cent, with a band of plus or minus 2 per cent.

There are several factors that could contribute to roiling the RBI's inflation targeting plans. The first is the 7th pay commission proposals that have recommended a 23.5 per cent increase in salary, allowances and pension for serving government staff and pensioners. The impact of this hike was not factored in by the RBI while setting the 5 per cent retail inflation target for March 2017.

The second is food inflation. Different food item prices in the inflation basket are showing varying trends. January inflation data shows retail food prices rose 6.85 per cent on the year in January, accelerating from a 6.40 percent pace in December. A deficient monsoon may exert further pressure on food prices.

The headline inflation numbers are also being impacted by services inflation, which has been sticky since September 2015 across housing, transport and communications, medical and other services.

And crude oil prices may not remain benign throughout the next financial year. The 5 per cent inflation target is set under the assumption of a normal monsoon this year and the current level of international crude oil prices, RBI had said at the sixth bi-monthly monetary policy review on February 2. For Dr. Rajan, the vigil on price gains will continue for now.