CPI fall allows RBI to continue with its stance, say economists

The surprise fall in August retail inflation gives the Reserve Bank of India (RBI) room to continue with its accommodative stance for longer, and keep a lid on any criticisms about it, say economists.

The August consumer price index (CPI) inflation was at 5.3 per cent, lower than the consensus of 5.6 per cent. This is also lower than what the RBI had predicted. The central bank had expected inflation at 5.9 per cent for the second quarter ended September, and 5.3 per cent for the third quarter ended December.

The CPI print was at 6.3 per cent in May and June before cooling to 5.6 per cent in July.

The RBI has adopted an accommodative stance “for as long as necessary” till growth takes hold on a durable basis. But the recent inflation prints, bordering the upper range of the RBI’S 6 per cent target, made the monetary policy members spur on the policy path. External member Jayanth Varma voted against an accommodative stance in the policy, but the other five members favoured continuation of the stance, even as they expressed concerns about inflation.

Economists say much of those concerns will be taken care of by the latest print, and the central bank can take no action to change the stance in its October 6-8 monetary policy discussions.

Inflation could fall to 4.5 per cent yearon-year (YOY), or even to 4.2 per cent in September, if the current price momentum continues and “if onion and potato prices remain well behaved through the end of this month", said Kaushik Das, chief economist of Deutsche Bank.

“If India manages to avoid a third wave after the festival seasons in October, then the RBI can potentially increase the reverse repo rate by 20 basis points (bps) to 3.55 per cent in the December 2021 policy, while keeping the accommodative stance unchanged,” Das wrote in his report. Aditi Nayar, chief economist of ICRA, said policy normalisation could commence in February 2022, “with a change in the stance of monetary policy to neutral from accommodative, followed by a hike in the repo rate of 25 bps each in the April 2022 and June 2022 meetings.”