The Reserve Bank of India’s policymakers have acted predictably in opting to keep interest rates unchanged and in retaining the ‘neutral’ stance. Price stability, after all, remains the Monetary Policy Committee’s primary remit, and trend line retail inflation continues to run above its medium-term target of a durable headline inflation reading of 4%. But as with all central bank policy statements, it is not only the action but also what is said that is closely scrutinised for clues on what may lie ahead. The RBI’s bimonthly monetary policy statement, unfortunately, ends up sending mixed messages as its outlook for inflation and assessment of the factors contributing to price gains are at variance. 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. It sees price gains having slowed to 4.5% over January-March — a full 60 basis points lower than the 5.1% pace it had projected in February. Forecasts for the first and second halfs of 2018-19 have also been substantially trimmed. Price gains in the first half are now in the 4.7-5.1% range (as against 5.1-5.6% projected in February), with inflation slowing in the second half to 4.4%.
The key factors cited by the RBI in lowering its inflation projections are a “sharp decline in vegetable prices and significant moderation in fuel group inflation.” In extending the moderation in food prices in February-March as a major driver of the lowered trajectory for price gains in the new financial year, the RBI is not fully convincing on account of an assertion (of a “likely reversal in food prices in H1”) and an assumption (of a “normal monsoon”). Despite a private weather forecaster’s projection of normal rains from June to September, the MPC itself acknowledges the risks that temporally or spatially deficient monsoon rainfall could pose to food prices. Also, policymakers appear to have glossed over the RBI’s March survey of households’ inflation expectations — where prices are seen edging up over the three-month and one-year-ahead horizons — as well as feedback that manufacturers expect input and output prices to rise. Volatility in oil prices too have been played down. The other surprise is the decision to jettison Gross Value Added as the main measure of economic output and switch to Gross Domestic Product. While the assertion that GDP growth will strengthen this fiscal has given investors cause for cheer, the forecast of 7.4% is unchanged from the implicit projection from February. The messaging on the economy could have been clearer and more consistent.
