Is RBI 'too hasty' in its downward revision of projected inflation?
Clouds of uncertainty hovered around inflation outlook a few months ago. The oil prices took a nasty upward turn, so did the value of rupee, which depreciated sharply against the strong dollar. It was hard to believe that the inflation trajectory will see softness anytime soon. As a result, the RBI's inflation projection too moved around 4 per cent, which is also the target for the CPI inflation for the monetary policy committee (MPC). The six-member MPC sets the interest rates in the economy. The repo rate, the rate at which the banks borrow from RBI, has already started moving up since January this year after a long four-year easing cycle. Finally, a sudden downward spiral in food and fuel inflation brought some cheers for the market. In fact, the volatility in the oil prices is too high to settle on any level at this point of time. The oil producing and exporting countries are already working on production cuts, which means the prices will not fall drastically. Back in India, the petrol and diesel prices are still at elevated level despite the recent fall in oil prices. This will certainly fuel inflation. There are several global factors from rising interest rates to unwinding of balance sheet by global banks, which could be a bad news for the Indian currency. Given the developing global factors, it looks that the RBI has been a bit hasty in lowering the projected inflation target. In today's policy, the projected inflation target has been lowered by RBI from 3.9-4.5 per cent set earlier to 2.7 -3.1 per cent in the second half (Oct-Mar) of 2018-19. Similarly, the inflation target of 4.8 per cent in the first quarter (April-June) of 2019-20 has been lowered to 3.8-4.2 per cent in the first half of 2019-20, though with risk tilted to the upside. But changing the projected inflation target is surprising as the inflation excluding fuel and food remains at elevated level. There is also no inflation comfort in the medium-term as the 2019-20 first quarter target is still close to 4 per cent. If the inflation goes down as expected by the RBI, the central bank is mostly likely to change its stance of 'calibrated tightening' to 'neutral.' In fact, one of the six members of the monetary policy committee (MPC), Ravindra Dholakia has already voted for changing the stance to 'neutral'. "We need few more data points. The volatility in oil is very high. We will take a call as and when required," said Urjit Patel, governor, RBI at the media interaction. The repo rate, which dropped to 6 per cent, currently stands at 6.5 per cent.