RBI: Inflation outlook remains uncertain

The RBI said that, overall, the inflation outlook remains highly uncertain and cautioned that the trajectory excluding food and fuel needs to be carefully monitored. The monetary policy committee noted that inflation has surged above the upper tolerance band around the target in December 2019, primarily on the back of the unusual spike in onion prices. Over the coming weeks and months, onion prices are likely to ebb as supply conditions improve.

“The salutary effects on headline inflation are, however, likely to be tempered by hardening of prices of other food items, notably those of pulses and proteins. Meanwhile, adjustments to telecom charges are imparting cost-push pressures to CPI inflation, excluding food and fuel,” the MPC said in its statement.

Retail inflation has surged to a five-year high of 7.4% in December, largely led by a spike in food prices, triggering worries over the building up of inflationary pressures.

“Going forward, the trajectory of inflation, excluding food and fuel, needs to be carefully monitored as the passthrough of remaining revisions in mobile phone charges, the increase in prices of drugs and pharmaceuticals and the impact of new emission norms play out and feed into inflation formation,” according to the statement.

“The MPC anticipates that the combination of these factors may keep headline inflation elevated in the short run, at least through H1 of 2020-21. Accordingly, MPC will remain vigilant about the potential generalisation of inflationary pressures as several of the underlying factors cited earlier appear to be operating in concert.”

The MPC raised the CPI inflation projection to 6.5% for Q4, 2019-20; 5.4-5.% for H1, 2020-21; and 3.2% for Q3, 2020-21, with risks broadly balanced. The panel also forecast growth for 2020-21 at 6% as monetary transmission in terms of a reduction in lending rates and financial flows to the commercial sector have progressed visa-vis the last policy, and this could spur both consumption and investment demand. It said the rationalisation of personal income tax rates in the Budget should support domestic demand, along with measures to boost rural and infrastructure spending. MPC observed that the economy continues to be weak and the output gap remained negative.

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