)
As was widely expected in the markets, the monetary policy kept all policy rates unchanged. Although the decision was on expected lines, the market focus was on the Reserve Bank of India (RBI)'s forecast of CPI (Consumer Price Index)- based inflation. RBI appears comfortable that the January 2015 retail inflation target of eight per cent is achievable but its model-based forecast formally quantifies the upside risks to the January 2016 target of six per cent.
In the newly introduced Monetary Policy Report, RBI has projected that CPI-based inflation for the fourth quarter of FY16 could be 7 per cent under baseline assumptions of a normal monsoon, gradual moderation in crude oil prices, GDP growth of 6.3 per cent in FY16, no structural change in the economy and an unchanged policy stance in FY16, too. This forecast is similar to our own projection and initially led the market to believe that the central bank could become more hawkish going forward.
However, in the press conference after the policy, Governor Raghuram Rajan clarified RBI would like to have a subjective overlay on these model-based forecasts. Based on their subjective assessment, it is still possible to reach the January 2016 inflation target of 6 per cent with an unchanged monetary policy stance, if the government takes necessary action to reduce food inflation. Unfortunately, forecasting accuracy for CPI over a longer horizon is likely to be low because food comprises almost half of the CPI basket. That is why Rajan stressed on "data dependency" in the press conference and we believe that this is going to be the operative phrase going forward. We have long maintained that the RBI will be on an extended pause (no rate cut in 2015) as the disinflation process takes shape and the government takes necessary steps to improve the food supply. The monetary policy reaffirms our view.
Samiran Chakraborty
Managing Director, Regional Head of Research, South Asia Global Research, Standard Chartered Bank
Managing Director, Regional Head of Research, South Asia Global Research, Standard Chartered Bank
