RBI signals a hawkish pause

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RBI estimates CPI inflation to be in the range of 5.1% to 5.6% in H1 , including diminishing statistical HRA impact of central government employees and around 4.5% to 4.6% in H2 , with risks tilted to the upside.

RBI believes that the inflation outlook for next fiscal would be driven by various factors including international crude oil prices which have firmed up since August 2017 accompanied by an uptick in non-industrial raw material prices and monsoon, which has been assumed to be normal. The projected moderation in inflation in the second half is on account of strong favourable base effects , including unwinding of the 7th CPC’s HRA impact , a softer food inflation forecast , given the assumption of normal monsoon and effective supply management by the Government.

The surprise probably was the Reserve Bank of India (RBI) now appears reconciled to not achieving the 4 percent inflation at least for the next 15 months.

Governor Urjit Patel raised the near-term and medium-term inflation forecast to some extent. The FY18 4th quarter inflation forecast is upped to 5.1 percent from 4.7 percent and the inflation for the first half of next year is placed at 5-5.6 percent. Consumer price index (CPI) is estimated to dip to 4.5 percent only by March 2019. Just to remind all of you the MPC was given a 4 percent inflation target for the 5 years ending 2020 and as of 2019 , we are only at 4.5 by estimates.

However , the governor made it clear that recovery is at a “nascent stage” and it must be “nurtured” – again an uncharacteristic statement from an MPC which has an inflation target , not a growth target.