Keeping in view the domestic demand-supply balance, the global trends in commodity prices and the likely demand scenario, the baseline projection for WPI inflation for March 2013 is placed at 6.5%, the Reserve Bank of India (RBI) said while announcing its annual policy for FY13.

Overall, inflation is expected to remain range bound during the year (2012-13), the RBI said.

Though inflation has moderated in recent months, it remains sticky and above the tolerance level, even as growth has slowed, RBI Governor D. Subbarao said in a statement.

"These trends are occurring in a situation in which concerns over the fiscal deficit, the current account deficit and deteriorating asset quality loom large," he said.

The challenge for monetary policy will thus be to maintain its vigil on controlling inflation while being sensitive to risks to growth and other vulnerabilities, Dr. Subbarao said.

Inflation in FY12 evolved broadly along the trajectory projected by the RBI. The March 2012 inflation at 6.9% was close to the central bank's indicative projection of 7%.

Going forward, the inflation scenario remains challenging, the RBI cautioned. Food inflation, after a seasonal decline, has risen again. Inflation in respect of protein-based items remains in double digits, the central bank said.

Crude oil prices are expected to remain high and the pass-through of past price increases in the international market to domestic petroleum product prices remains significantly incomplete, the RBI noted.

There also remains an element of suppressed inflation in respect of coal and electricity, according to the RBI.

However, non-food manufactured products inflation is expected to remain contained, reflecting the lagged effect of past monetary policy tightening on aggregate demand.

Corporate performance numbers also indicate that the pricing power has reduced.

Consequently, the risk of adjustments in administered prices translating into generalised inflationary pressures remains limited, though there is no room for complacency.