Reserve Bank cuts inflation forecast
IN ITS meeting last week, the Monetary Policy Committee (MPC) surprised analysts by voting to cut the benchmark repo rate by 25 basis points (bps). As seen in Chart 1, the repo rate now stands at 6.25 per cent.
With inflation continuing to surprise on the downside (Chart 2), the MPC also lowered its inflation forecasts. As against its earlier projection of inflation to range between 2.73.2 per cent in H2FY19 and 3.8-4.2 per cent in H1FY20, it now expects inflation at 2.8 per cent in Q4FY19 and 3.2-3.4 per cent in H1FY20.
But, even as food prices continue to contract (Chart 3), exerting downward pressure on headline inflation, the MPC noted that a “reversal in vegetable prices could impart upside risk to the food inflation trajectory.”
And while the outlook for oil continued to be hazy, crude oil prices have recovered from their December lows, but remain below their peak levels (Chart 4), the MPC also noted that household three months ahead inflation expectations had fallen by 80 bps in December 2018, and one year ahead expectations had declined by 130 bps (Chart 5).
On the growth front, the MPC also noted that “high-frequency indicators of the services sector suggest some moderation in the pace of activity. Sales of motorcycles and tractors imply weakening of rural demand in December” (Chart 6). And though capacity utilisation rates had picked up (Chart 7), and gross fixed capital formation had shown healthy growth off late (Chart 8), the MPC noted that “some indicators of investment demand, viz., production and imports of capital goods, contracted in November/December.” Thus to “strengthen private investment activity” and “buttress private consumption”, the MPC voted to cut the repo rate by 25 bps and change the stance of monetary policy from calibrated tightening to neutral.