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<b>Statsguru:</b> Uncertain inflation outlook

Retail inflation, measured by the Consumer Price Index (CPI), declined to a 24-month low of 3.63 per cent in November

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Ishan Bakshi
Last Updated : Dec 19 2016 | 10:04 AM IST
In its most recent meeting, the Monetary Policy Committee (MPC) chose to maintain status quo on interest rates, citing upside risks to inflation. But is the Reserve Bank of India (RBI) overestimating the threat of higher inflation in the coming months? 

As chart 1 shows, retail inflation, measured by the Consumer Price Index (CPI), declined to a 24-month low of 3.63 per cent in November. Food inflation, which was the key driver of inflation, also moderated to 2.11 per cent. Recent data also do not suggest any upside risks to food inflation. As chart 2 shows, the First Advance Estimates of major crops show an increase in production compared to the previous year. And, despite concerns, the area under sowing has also increased as shown in chart 3. While this should allay concerns over supply disruptions, the RBI fears that after demonetisation, price corrections may depress supplies, causing food inflation to rise. 

The other risk to inflation stems from higher crude oil prices. As chart 4 shows, crude oil prices are up 20 per cent since November 8. Higher crude oil prices would not only have a direct impact on the fuel component of CPI, but also have a cascading effect throughout the system. 

Core inflation has continued to remain sticky as shown in chart 5. But, with industry only operating at 73 per cent capacity in the first quarter of 2016-17, a compression in demand after demonetisation could moderate core inflation, dragging down headline inflation. 

Analysts remain divided on the trajectory of inflation. While the RBI has projected inflation at five per cent in the fourth quarter of FY17, private forecasters have predicted CPI to range between 3.6 and 6.3 per cent. Perhaps the uncertainty compelled the RBI to refrain from cutting rates.

 

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First Published: Dec 19 2016 | 10:04 AM IST

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