Retail inflation may rise to 4% in FY20: Report

Headline inflation, the key gauge tracked by the Reserve Bank for setting its policy rates, will increase by 0.60 percentage point to 4 per cent in 2019-20, a report said Monday.

The rise in the consumer price inflation (CPI) will be largely on a surge in food inflation to 3 per cent from the abnormally low of 0.1 per cent, the report by the research arm of domestic ratings agency Crisil said.

It added that the surge in the overall inflation is largely due to statistical reasons, because of a low-base effect.

It can be noted that under the medium term inflation targeting framework, the Reserve Bank is committed to ensuring inflation is at 4 per cent with a two percentage point leeway on either side.

Crisil said FY2018-19 is the second consecutive year that the inflation has undershot the RBI's target of 4 per cent.

Its chief economist Dharmakirti Joshi said the low food inflation should sustain if the RBI were to achieve its aim of containing inflation.

In a special report, the agency brought out two scenarios on the way it expects the price-rise scenario to pan out.

In the "upside scenario", rains will play truant due to the El Nino factor leading to a surge in food inflation, which could take the headline inflation to 5 per cent, while in the "downside scenario" it could be lower at 3.5 per cent on food inflation undershooting expectations for longer and other factors like economic slack and restrained spending by the government.

On the volatile fuel prices, the report said that it will have limited impact on the headline number because of the lower weightage.

"Core inflation, which is supposed to be a better gauge of demand-side pressures in the economy, has been fairly sticky downwards, irrespective of economic cycles," Joshi said.

The report said households' inflation expectations have softened since the shift to explicit inflation targeting by the RBI, but the same is not the case with the well-informed professional forecasters, who are now pegging the number at 4.2 per cent.

The agency stressed that this is not the first time that the country is witnessing a low inflation and added that for six years to fiscal year 2006, inflation averaged 3.9 per cent as against the 4.5 per cent in FY15-19.