RBI raises CPI inflation to 6.5% for Oct-Dec, outlook 'highly uncertain'

The Reserve Bank of India has raised upwards its retail inflation projection for the last quarter of the current fiscal to 6.5 per cent on increase in prices of milk, pulses amid volatile crude oil prices and termed the overall outlook on price rise as "highly uncertain".

Going forward, the inflation outlook is likely to be influenced by several factors like food inflation, crude prices and input costs for services, RBI said.

On food inflation, RBI said it is likely to soften from the high levels registered in December and the decline is expected to become more pronounced during the fourth quarter of this fiscal as onion prices ease following arrivals of late kharif and rabi harvests, the Reserve Bank of India (RBI) said in its last bi-monthly monetary policy revealed on Thursday.

The RBI has kept the key repo rate unchanged to 5.15 per cent.

"Taking into consideration these factors, and under the assumption of a normal south west monsoon in 2020-21, the CPI inflation projection is revised upwards to 6.5 per cent for Q4:2019-20 (January-March 2020); 5.4-5 per cent for H1:2020-21 (April-September 2020); and 3.2 per cent for Q3:2020-21 (October-December), with risks broadly balanced," RBI said.

RBI said the recent pick-up in prices of non-vegetable food items, specifically in milk due to a rise in input costs, and in pulses due to a shortfall in kharif production, are all likely to sustain.

"These factors could impart some upward bias to overall food prices. Second, crude prices are likely to remain volatile due to unabating geo-political tensions in the Middle East on the one hand, and the uncertain global economic outlook on the other. Third, there has been an increase in input costs for services, in recent month," it added.

Talking about high onion prices that ranged between Rs 150-200 a kg in the recent past, RBI said the actual inflation outcome for Q2 at 5.8 per cent overshot projections by 70 bps, primarily due to the intensification of the "onion price shock" in December 2019 on account of unseasonal rains in October-November.

In its previous monetary policy in December 2019 as well, the RBI had raised its inflation projection to 5.1-4.7 per cent for the second half of the current fiscal on the back of spike in prices of vegetables such as onion and tomatoes.

Subdued demand conditions, muted pricing power of corporates and correction in energy prices since the last week of January may limit the pass-through to selling prices, RBI said.

"Base effects would turn favourable during Q3:2020-21 and the increase in customs duties on items of retail consumption in the budget may result in only a marginal one-time uptick in inflation," RBI said.