Why in news?
The Reserve Bank of India decided to leave interest rates unchanged in the recent monetary policy review.
How is the inflation scenario?
- The RBI now expects retail inflation to stay below the legally mandated 4% mark for the coming 12 months.
- Resultantly, RBI has sharply cut its inflation forecast for the second half of the current fiscal year - from 3.9-4.5% to 2.7-3.2%.
- For the first half of the next financial year, it has been revised from around 4.8% to 3.8-4.2%.
- The RBI’s own household survey of inflation has shown a 40 basis point downward movement over the last round.
- Retail inflation is expected to fall further. E.g. the November data is estimated at 3%
- The dip in retail inflation is largely a result of the unexpected deflation in food items such as pulses, vegetables and sugar.
What is RBI's rationale?
- Over the policy reviews, RBI has maintained its single-minded focus on targeting only retail inflation and inflation expectations.
- But despite a favourable inflation trajectory, the monetary policy committee did not cut the repo rates.
- An analysis of the components of retail inflation explains this.
- Evidently, the headline retail inflation, mapped by year-on-year changes in the consumer price index, has decelerated sharply.
- This is primarily driven by the sharp decline in food and fuel prices.
- However, the non-food, non-fuel retail inflation has actually risen to over 6%.
- Moreover, the RBI is worried about
- the residual impact of minimum support prices
- possible fiscal slippages
- a sudden increase in oil prices if the OPEC countries decides on production cuts
- So the RBI wants to pause and decide only after ensuring the decline in inflation is of a more robust nature.
What is RBI's stance on growth?
- The Q2FY19 gross domestic product (GDP) data undershot the RBI’s projection.
- However, the RBI maintains its annual forecast of 7.4% GDP growth in the current financial year.
- Economic growth has suffered in most of the advanced world.
- Both the US and the euro area have slowed even as Japan has contracted in the past quarter.
- Moreover, several emerging economies such as China and Russia, too, have decelerated.
- Yet, the RBI sounded relatively confident about the domestic economy.
- It highlighted the increased capacity utilisation in manufacturing sector, improving credit offtake and lower crude oil prices that may boost consumption.
- Notably, capacity utilisation in manufacturing sector rose to 76.1% in Q2, higher than the long-term average of 74.9%.
- Also, industrial firms reported an improvement in the demand outlook for Q4.
- But besides these, RBI has once again raised a cautionary signal to governments, both at the Centre and in the States.
- Fiscal slippages risk impacting the inflation outlook, heightening market volatility and crowding out private investment.
- Instead, this may be an opportune time to bolster macroeconomic fundamentals through fiscal prudence.
Source: Business Standard, The Hindu
