Near-term inflation outlook benign, but RBI expected to hold on for now

Consumer price inflation (CPI) saw an overall slip of 2.99 per cent in April this year compared to 3.89 per cent in March. Rural CPI stood at 3.02 per cent and the urban CPI was at 3.03 per cent in April 2017 while retail inflation jumped to a five-month high at 3.81 per cent in March.

The fall in inflation was broad-based and the CPI excluding vegetables also fell to the lowest level since 2012. Price indices for vegetables and pulses fell sharply compared to the year-ago period, leading to a fall in headline inflation rate. Food and beverage inflation fell to 1.21 per cent in April compared to 2.5 per cent in March. Fuel and lighting inflation rose to 6.13 per cent compared to 5.5 per cent in March. Housing inflation was at 4.86 per cent compared to 4.96 over the same period.

Under the new series, wholesale price inflation stood at 3.85 per cent in April, compared to 5.29 per cent in March. Under the old series, wholesale inflation in March stood at 5.7 per cent.

The consumer price inflation is well within the limit of 2 to 6 per cent, prescribed by the Reserve Bank of India (RBI). So, does a sharper-than-expected fall in CPI provide sufficient room for further rate cuts? Not in the near-term. According to Nomura, the RBI is looking through the current low inflation prints and may keep policy rates unchanged in 2017. Nomura expects headline CPI inflation to rise sharply to 5.5-6 per cent in the fourth quarter of 2017 and the first half of 2018, before stabilising around its steady state of around 5 per cent in the second half of 2018. “As growth accelerates due to lagged effects of easier financial conditions and as it becomes clear that inflation will continue to stay above its medium-term target of 4 per cent owing to still-elevated inflation expectations, we expect the RBI to move towards a tightening policy bias towards end-2017 and hike repo rates by a cumulative 50 bps in 2018, starting next April,” the report added.

Earlier this month, the central bank left key policy rate unchanged at 6.25 per cent for the third review in a row, citing upside risks to inflation. It had, however, increased the reverse repo rate by 0.25 per cent to 6 per cent.

[Source:- businesstoday]