Surprise softening: on RBI’s inflation projections

• The recent MPC meet resulted in no change in the interest rate which was quite predictable seeing the present status of the indicators.

• Price stability and trend line retail inflation continues to run above its medium-term target of a durable headline inflation reading of 4%.

• 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.

=> Some Takeaways from the bimonthly Report

• The policy repo rate under the liquidity adjustment facility (LAF) unchanged at 6.0 percent, which means the reverse repo rate under the LAF remains at 5.75 percent, and the marginal standing facility (MSF) rate and the Bank Rate at 6.25 percent.

• MPC has lowered its projections for CPI (consumer price index) inflation for the fourth quarter of 2017-18, and for the new fiscal year.

• Price gains having slowed to 4.5% over January-March — a full 60 basis points lower than the 5.1% pace it had projected in February. Forecasts for the first and second halfs of 2018-19 have also been substantially trimmed.

• Price gains in the first half are now in the 4.7-5.1% range (as against 5.1-5.6% projected in February), with inflation slowing in the second half to 4.4%.

• Revised formula for minimum support price as announced in the Union Budget 2018-19 for kharif crops may have an impact on inflation.

• Postpone implementation of Indian Accounting Standards (Ind AS) from April 1, 2018 to April 1, 2019 for scheduled commercial banks.

• Set up a Data Sciences Lab within the RBI that will comprise experts and budding analysts, internal as well as lateral, who are trained in computer science, data analytics, statistics, economics, econometrics and/or finance. This will be operational by December 2018.

• The decision to jettison Gross Value Added as the main measure of economic output and switch to Gross Domestic Product.

• RBI lowering its inflation projections is due to sharp decline in vegetable prices and significant moderation in fuel group inflation.

• The moderation in food prices in February-March is a major driver of the lowered trajectory for price gains in the new financial year

• 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.

• RBI’s March survey of households’ inflation expectations showed prices to be edging up over the three-month and one-year-ahead horizons — as well as feedback that manufacturers expect input and output prices to rise.

• The assertion that GDP growth will strengthen this fiscal has given investors cause for cheer, the forecast of 7.4% is unchanged from the implicit projection from February.

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