MPC has acted predictably in opting to keep interest rates unchanged and in retaining its ‘neutral’ stance (i.e. rates further could move in either direction).
But the central bank’s policy statements are in contradiction with its actions and therefore MPC has sent out mixed signals.
How does the inflation outlook look?
Price stability remains the primary focus of RBI’s “Monetary Policy Committee” (MPC) decisions regarding interest rates.
Currently, trend line retail inflation (based on Consumer Price Index), continues to run above its medium-term target of 4%.
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.
RBI has predicted an inflation slowdown over the next quarter and has cited sharp declines in vegetable prices and moderation in fuel prices as reasons.
But these inflation projections contradict public expectations.
What are the issues with RBI’s projections?
Inflation - RBI is not fully convincing in its assertions as a food price reversal and the assumption of a “normal monsoon” aren’t clear.
Notably, despite weather predictions of a normal monsoon, MPC itself has flagged risks of temporally or spatially deficient monsoon over food prices.
Also, MPC seems to have glossed over the RBI’s March survey of households’ inflation expectations — where prices are seen to be increasing.
Feedback from manufacturers also suggests that they expect input and output prices to rise, all which don’t seem to indicate softening inflation pressures.
Additionally, while fuel prices are said to ease, MPC seems to have ignored or down played the volatility in the sector.
Growth - Gross Value Added (GVA) has been replaced by Gross Domestic Product (GDP) as the main measure of economic output, which is surprising.
While the policy statement asserts that GDP growth will strengthen in the current fiscal, the earlier forecast of 7.4% has been left unchanged.
Hence, the messaging on the economy by the RBI is ambiguous and could have been clearer and more consistent.
