On Tuesday, RBI cited low domestic capacity utilisation
While cutting the repo rate by 25 basis points to 7.25 per cent on Tuesday, the Reserve Bank of India raised its inflation estimate for January 2016 from 5.8 per cent to six per cent, and cautioned against the risks of a deficient monsoon, rising oil prices and a volatile external environment.
While some are interpreting this as a signal for a long pause, at least till December, others say inflation will undershoot RBI’s January estimate.
On Tuesday, RBI cited low domestic capacity utilisation, mixed indicators of a recovery and subdued investment and credit growth.
“Though RBI has left the door open to further easing in the event of further disinflation, we expect it to stay on a prolonged pause (until end-2016), as we believe growth is in the initial stages of a business cycle recovery, inflation appears to be stabilising at 5-5.5 per cent and inflation expectations are still elevated,” Nomura’s Sonal Varma said in a note to clients.
According to the central bank, the India Meteorological Department has predicted a below-normal monsoon, owing to which astute food management is needed to mitigate possible inflationary effects.
Chief economic advisor Arvind Subramanian has said the government will try to contain inflationary risks if the monsoon turns out to be weak.
He cited the instance of last year, when food prices stayed under control despite a weak monsoon due to pro-active food management by the government.
In the past, softening crude oil prices contributed to easing of inflation.
But RBI Governor Raghuram Rajan said in recent times crude oil prices had been firming amid considerable volatility, adding there were geopolitical risks. Besides, volatility in the external environment could impact inflation, he said.
“We don’t expect a further cut in the repo rate in FY16, as based on our expectation of inflation for the year, we believe a repo rate of 7.25 per cent is appropriate.
"A further cut this financial year is possible only if inflation significantly undershoots RBI’s estimate,” said A Prasanna, chief economist, ICICI Securities Primary Dealership.
The central bank expects till August, inflation will be pulled down by the base effect but might start rising to about six per cent by January 2016, slightly higher than the projection in April.
Data released for April showed Consumer Price Index-based inflation eased to 4.86 per cent, the lowest in four months, primarily due to declining food prices. Inflation has been undershooting RBI’s inflation trajectory, which had led to hope of a rate cut.
RBI had targeted inflation below six per cent by January 2016 and four per cent (+/- two per cent) by the end of the two years starting 2016-17.
