Re­serve Bank cuts in­fla­tion fore­cast

Business Standard - - ECONOMY & PUBLIC AFFAIRS - ISHAN BAK­SHI Source: RBI Source: MOSPI Source: Trac­tor and Mech­a­niza­tion As­so­ci­a­tion and SIAM Source: Bloomberg Source: RBI Source: MOSPI Source: RBI Source: MOSPI

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.

2: RE­TAIL IN­FLA­TION DIPS TO 2.19% IN DE­CEM­BER, CORE RE­MAINS STICKY

4: OIL PRICE OUT­LOOK CON­TIN­UES TO BE HAZY

6: SALES OF MO­TOR­CY­CLES AND TRAC­TORS IM­PLY WEAK­EN­ING OF RU­RAL DE­MAND IN DE­CEM­BER(Num­bers)

5: HOUSE­HOLD IN­FLA­TION EX­PEC­TA­TIONS DIP

8: IN­VEST­MENT AC­TIV­ITY PICKED UP IN Q2FY19

1: MPC CUTS BENCH­MARK REPO RATE BY 25 BPS TO 6.25%

7: CA­PAC­ITY UTIL­I­SA­TION ALSO PICKS UP

3: MPC FEARS RE­VER­SAL IN VEG­ETABLE PRICES COULD IM­PART UP­SIDE RISK TO FOOD IN­FLA­TION TRA­JEC­TORY (%, y-o-y)

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