There are no significant departures in the inflation outlook from the baseline inflation trajectory-RBI Annual Report 2013-14

While inflation trends during the rest of 2014-15 will also be conditional on several risk factors and the timing and extent of further revisions in administered prices, the inflation projections for 2014-15 remain in reach

As per the latest RBI Annual Report 2013-14, after remaining above 8 per cent during April-May 2014, CPI inflation (y-o-y) moderated to 7.5 per cent in June 2014 largely driven by the favourable base effect. However, inflation increased to 8.0 per cent in July 2014 as prices of vegetables increased substantially on the back of deficient monsoon rainfall. The sequential changes in food prices also indicated a significant inflation build-up in select components such as fruits, protein-rich items like eggs, fish, meat, milk and pulses during Q1 of 2014-15. CPI excluding food and fuel inflation, however, eased to 7.4 per cent in July 2014 from close to 8 per cent in April and May 2014.

Some stability in the exchange rate, has, mitigated the risk to inflation from exchange rate pass-through during 2014-15 so far. Global crude oil prices (Indian basket) declined from above US$ 110 per barrel, witnessed in June 2014 on account of geopolitical tensions in the Middle East, Ukraine, and supply outages in Libya to about US$ 105 per barrel in the latter half of July 2014. However, given the tight demand-supply balance, any risk to crude oil supply could have a large impact on prices and as such remains an upside risk going forward.

The revisions in administered prices during 2014-15, which include railway fare and freight fares apart from the staggered increases in diesel prices, could exert some pressure on generalised price levels. However, much of this will reflect the release of suppressed inflation in the past and, therefore, is desirable to keep medium term inflation under control. Moreover, the smaller increases in the minimum support prices (MSPs) will help somewhat in restraining food price pressures.

Overall, there are no significant departures in the inflation outlook from the baseline inflation trajectory indicated by the Reserve Bank at the start of 2014-15, when it committed to a disinflationary glide path of taking CPI inflation to 8 per cent by January 2015 and 6 per cent by January 2016. The Reserve Bank, in its Third Bi-Monthly Monetary Policy Statement, 2014-15 in August 2014 indicated that inflation at 8 per cent in early 2015 seems likely. Subsequent data release in terms of a higher CPI inflation driven by vegetable price spike indicate that the upside risks to this assessment persist.

However, some of the increase in food prices could be temporary and there are early indications that the price corrections are underway in select items like tomato. Also, recent decline in oil prices could partly offset the pressure from food prices. While inflation trends during the rest of 2014-15 will also be conditional on several risk factors and the timing and extent of further revisions in administered prices, the inflation projections for 2014-15 remain in reach. Though the balance of risks around the medium-term inflation path, and especially the target of 6 per cent by January 2016 are still to the upside, the Reserve Bank remains committed to supporting the disinflationary process.

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