The Reserve Bank of India’s conservative inflation forecast for the fiscal year which was criticised, may indeed be
turning out to be true as economists now expect inflation to rise beyond the 4% target prescribed under the inflation targeting framework. Economists are tempering their expectations on the rate reduction possibilities during the year even as good monsoon is likely to cool prices and improved infrastructure helps improve productivity.

Source: Economic Times

The July inflation as measured
by the Consumer Price Index at 2.4%, almost double the June levels of 1.4%, has surprised many.

Even though food prices, especially tomato prices, did contribute to July inflation in some ways, a number of non-food factors like impact of the house rent allowances and initial impact of the Goods and Service Taxes (GST), have contributed to the July inflation numbers.

“We expect headline CPI inflation to continue to rise in the coming months due to higher food price inflation, HRA increases, GST impact and a gradual growth recovery later this year,” said Sonal Varma, chief India economist at Nomura Securities. “We expect CPI inflation to rise to 4.5% by March 2018.”
The RBI has been drawing flak for the past few months since the inflation reading were sharply lower than what it had forecast.

Some, including chief economic adviser Arvind Subramanian had questioned the central bank’s inflation forecasting models.

After the July numbers, economists have revised their inflation forecast upward. They are now close to RBI and some expect it to be even higher. In its August statement RBI had forecast CPI inflation of a little over 4% by March excluding the HRA impact, as against 4.5% inclusive of the HRA in the June statement.

With the Federal Reserve’s likely unwinding the unprecedented quantitative easing likely to begin
this year, the chances of a rate cut by the MPC may got slimmer.


Leave a Reply

Your email address will not be published. Required fields are marked *