Consumer Price Index (CPI)-based inflation, the yardstick used by the Reserve Bank of India (RBI) to gauge movement in prices, has fallen to about five per cent through the past few months from double-digit levels a year ago.
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“The economy is likely to over-perform on RBI’s inflation target (six per cent by January 2016) by about 0.5-1 percentage point, opening up the space for further monetary policy easing,” it said.
“Structural shifts in the inflationary process are underway, caused by lower oil prices and deceleration in agriculture prices and wages. These are simultaneously being reflected in dramatically improved household inflation expectations.”
A fall in CPI-based inflation allowed the central bank to reduce the policy rate in January, after a prolonged pause. The inflation momentum (three-month average seasonally adjusted and annualised) had declined from about 15 per cent to less than five per cent, the survey said. The decline in food inflation, it added, was steeper.
While acknowledging upside risks to crude oil prices remained due to geopolitical uncertainties, the survey said a supply glut, coupled with weak global demand, was expected to keep crude prices favourable. “The average of estimates by the IMF (International Monetary Fund) for (crude spot) and by the US Energy Information Administration for Brent and West Texas intermediate crude indicates oil prices will be about 29 per cent lower in 2015-16 compared with 2014-15 ($59/barrel versus $82/barrel),” it said. It added the prices could increasingly be determined by the marginal cost of shale production, estimated at $60-65 a barrel.
The survey also stressed the need to benefit from the lower inflation by agreeing on a new monetary policy framework, in line with the recommendations of a committee headed by RBI Deputy Governor Urjit Patel. The committee, set up by RBI to review the country’s monetary policy framework, had suggested inflation targeting be the exclusive mandate of the central bank. It had also said a monetary policy panel be set up, which would be accountable for meeting the target.
“The government and RBI need to conclude the monetary policy framework agreement to consolidate the recent gains in inflation control and codify into an institutional arrangement what has become the de facto practice. This will signal both the government and RBI jointly share the objectives of low and stable inflation,” the survey said.
Now, the government and the central bank have to arrive at a decision on how to take the recommendations forward. Budget 2015-16, to be presented on Saturday, could through some light on the issue.