Surprise softening on rbi's inflation projections

Surprise softening on rbi's inflation projections

The RBI’s inflation projections belie (to give a false impression of) households’ and manufacturers’ expectations.

The Reserve Bank of India’s policymakers have acted predictably in opting to keep interest rates unchanged and in retaining the ‘neutral’ stance. Price stability, after all, remains the Monetary Policy Committee’s primary remit (to send or convey/cancel or refrain from exacting or inflicting (a debt or punishment)/postpone), and trend line retail inflation continues to run above its medium-term target of a durable headline inflation reading of 4%. But as with all central bank policy statements, it is not only the action but also what is said that is closely scrutinised for clues on what may lie ahead. The RBI’s bimonthly monetary policy statement, unfortunately, ends up sending mixed messages as its outlook (viewpoint on a topic/the prospect for the future/view) for inflation and assessment of the factors contributing to price gains are at variance. The MPC has appreciably lowered its projections for CPI (consumer price index) inflation for the fourth quarter of 2017-18, and for the new fiscal year. It sees 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%.

The key factors cited by the RBI in lowering its inflation projections are a “sharp decline in vegetable prices and significant moderation in fuel group inflation.” In extending the moderation in food prices in February-March as a major driver of the lowered trajectory (a course or route taken) for price gains in the new financial year, the RBI is not fully convincing on account of an assertion (of a “likely reversal in food prices in H1”) and an assumption (of a “normal monsoon”). Despite a private weather forecaster’s projection of normal rains from June to September, the MPC itself acknowledges the risks that temporally or spatially (pertaining to space and the relationship of objects within it) deficient monsoon rainfall could pose to food prices. Also, policymakers appear to have glossed over (to ignore or avoid unpleasant facts) the RBI’s March survey of households’ inflation expectations — where prices are seen edging up over the three-month and one-year-ahead horizons — as well as feedback that manufacturers expect input and output prices to rise. Volatility (liability to change rapidly and unpredictably, especially for the worse) in oil prices too have been played down (to try to make a problem or difficult situation seem less important than it is). The other surprise is the decision to jettison (to eliminate something/abandon or discard (someone or something that is no longer wanted)) Gross Value Added as the main measure of economic output and switch to Gross Domestic Product. While the assertion (a bold declaration without proof) 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. The messaging on the economy could have been clearer and more consistent.