On RBI's inflation projections — Surprise softening

Core inflation pressures building up: Core inflation - excluding food, fuel and petrol and diesel - has been sticky in the past three months, remaining unchanged at 5.1 per cent. Repo rate remains the lowest rate since November, 2010.

The more authoritarian regimes make it harder for people to use their own money, the harder people will work to get around those limitations - and, in doing so, create means of financial empowerment that can not be centrally controlled. The range for second half has also been lowered to 4.4 per cent.

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The decision of the MPC is consistent with the neutral stance of monetary policy in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4 per cent within a band of +/- 2 per cent, while supporting growth. This pre-supposes a normal monsoon and supply management by the government and discounts the volatility in global crude oil prices. The RBI's bimonthly monetary policy statement, unfortunately, ends up sending mixed messages as its outlook for inflation and assessment of the factors contributing to price gains are at variance. However in Q2 (4.7 per cent), in Q3 and in Q4 (4.4 per cent), there will be signs of moderation but the risks will be tilted to the upside. It is expected that the RBI could raise the FII investment limit of 5 per cent in government bonds to 6-7 per cent.

This, however, does not mean that the RBI is going to blindly throw the baby out with the bathwater. Five members of the panel, including the RBI Governor, voted for a status quo while executive director Michael Patra was the lone member who wanted the key rate to be hiked by 25 basis points. In sum, what has played out through the last fiscal and looks to probably get worse in the coming fiscal is a higher amount of uncertainty with higher inflation risks. The central bank has also turned more upbeat on the growth outlook following the recent run of positive economic activity data. While the assertion that GDP growth will strengthen this fiscal has given investors cause for cheer, the forecast of 7.4% is unchanged from the implicit projection from February. Dr Patel offered a succinct recipe to beat this eventuality, including strengthening of domestic macroeconomic fundamentals, rebuilding the balance sheets of banks and helping corporates to de-leverage their balance sheets.

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While inflation fears have eased in the short term, the RBI sounded cautious and opted to wait for more data instead of giving a clear indication of its policy path.

These comments were made by both the officials at the customary post-monetary-policy-review press conference. At the policy, the central bank offered another relief.

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  • Kelly Blake