Economy

Inflation may drop to 2.4% in FY21: RBI

Renewed bouts of global financial market volatility could exert pressure on the rupee, says the RBI.

Renewed bouts of global financial market volatility could exert pressure on the rupee, says the RBI.   | Photo Credit: V. V. Krishnan

Regulator refrains from making growth forecast amid COVID-19 induced fluid circumstances

The consumer price index (CPI)-based inflation, which had stayed elevated in the last few months, is expected to soften during the course of the financial year, the Reserve Bank of India (RBI) said in its monetary policy report (MPR).

“CPI inflation is tentatively projected to ease from 4.8% in Q1 of 2020-21 to 4.4% in Q2, 2.7% in Q3 and 2.4% in Q4, with the caveat that in the prevailing high uncertainty, aggregate demand may weaken further than currently anticipated and ease core inflation further, while supply bottlenecks could exacerbate pressures more than expected,” the RBI said. The central bank said, looking ahead, the balance of inflation risks is slanted even further towards the downside.

The MPR was released on Thursday. The report follows the unscheduled monetary policy meeting held in end March to discuss the uncertainties arising from the nationwide lockdown. Since the review was conducted in end March, the early policy review, scheduled for April, was withdrawn.

“Given the lockdown, the compilation of the CPI for March and the following few months by the National Statistical Office could also become challenging. For 2021-22, assuming a normal monsoon and no major exogenous or policy shocks, structural model estimates indicate that inflation could move in a range of 3.6-3.8%,” the RBI said. The RBI had reduced the repo rate by 75 basis points (bps) to 4.4% in the monetary policy review while cash reserve ratio was reduced by 100 bps to 3%. The cental bank, however, refrained from making any prediction on growth. “Under highly fluid circumstances in which incoming data produce shifts in the outlook for growth on a daily basis, forecasts for real GDP growth in India are not provided here, awaiting a clear fix on the intensity, spread and duration of COVID-19,” the RBI said while observing the economy was looking up before the virus broke out.

Oil price drop

“The sharp reduction in international crude oil prices, if sustained, could improve the country’s terms of trade, but the gain from this channel is not expected to offset the drag from the shutdown and loss of external demand,” the report said.

The RBI said relatively modest upsides are expected to emanate from monetary, fiscal and other policy measures and the early containment of COVID-19, if that occurs. However, it added, such uncertainties make the forecasting of inflation and growth highly challenging.

On exchange rates, the central bank said renewed bouts of global financial market volatility caused by the uncertainty of macroeconomic impact of the COVID-19, as in February-March 2020, could exert pressure on the Indian rupee.

“Should the rupee depreciate by 5% from the baseline, inflation could edge up by around 20 bps while GDP growth could be higher by about 15 bps through increased net exports,” it said.

In contrast, should COVID-19 normalise quickly, strong capital flows could revive. An appreciation of the rupee by 5% could moderate inflation by around 20 bps and GDP growth by around 15 bps vis-a-vis the baseline,” the RBI said.

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Printable version | Jun 3, 2020 9:29:56 AM | https://www.thehindu.com/business/Economy/inflation-may-drop-to-24-in-fy21-rbi/article31302536.ece

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