RBI ups inflation projection to 4.2-4.6% during second half

The Reserve Bank today raised its inflation projection to 4.2-4.6 per cent for the second half of the current fiscal due to firming global oil prices and uncertainty on kharif farm output.

RBI in its previous monetary policy in August had projected the Consumer Price Index (CPI) based retail to be in the range of 4-4.5 per cent during second half of 2017-18. “The inflation path for the rest of 2017-18 is expected to be shaped by several factors,” RBI said in its fourth bi- monthly monetary policy statement 2017-18 unveiled today.

While keeping the key lending rate unchanged, it said: “The decision of the MPC is consistent with a neutral stance of monetary policy in consonance with the objective of achieving the medium-term target for consumer price index inflation of 4 per cent within a band of +/- 2 per cent, while supporting growth.”

India’s retail inflation had swelled to 5-month high of 3.36 per cent in August on the back of costlier vegetables and fruits. The first advance estimates for kharif production poses some uncertainties; also, there are some price revisions pending the implementation of good and services tax (GST) taking place, RBI said. There has been an increase in CPI inflation excluding food and fuel; and international crude prices which started rising from July have firmed up further in September, it said.

“Taking into account these factors, inflation is expected to rise from its current level and range between 4.2-4.6 per cent in the second half of this year, including the house rent allowance by the Centre,” said the policy statement.

Reiterating its August policy, RBI said there are factors that continue to impart upside risks to this baseline inflation trajectory. Farm loan waivers by states and states’ implementation of salary and allowances are among these factors. “…an increase of (salary by) states similar to that by the Centre could push up headline inflation by about 100 basis points above the baseline over 18-24 months,” RBI said.

However adequate food stocks and effective supply management by government may keep food inflation more benign than assumed in the baseline, it said further.