RBI’s messaging on economy should have been clearer

Inflation projections belie households’ and manufacturers’ expectations

The Reserve Bank of India’s policymakers have acted predictably in opting to keep interest rates unchanged and in retaining the “neutral” stance. Price stability, after all, remains the Monetary Policy Committee’s primary remit, and trend line retail inflation continues to run above its medium-term target of a durable headline inflation reading of four per cent. 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. The MPC has appreciably lowered its projections for CPI (consumer price index) inflation for the fourth quarter of 2017-18, and for the new fiscal year.

The key factors cited by the RBI in lowering its inflation projections are a “sharp decline in vegetable prices and significant moderation in fuel group inflation.” Despite a private weather forecaster’s projection of normal rains from June to September, the MPC itself acknowledges the risks that temporally or spatially deficient monsoon rainfall could pose to food prices. Also, policymakers appear to have glossed over the RBI’s March survey of households’ inflation expectations — where prices are seen edging up over the three-month and one-year-ahead horizons — as well as feedback that manufacturers expect input and output prices to rise. Volatility in oil prices too have been played down. While the assertion that GDP growth will strengthen this fiscal has given investors cause for cheer, the forecast of 7.4 per cent is unchanged from the implicit projection from February.

The Hindu, April 6