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Statsguru: RBI maintains status quo on rates; retail inflation dips to 3.3%

The decision to maintain the status quo comes against the backdrop of retail inflation

Ishan Baksh 

Inflation, growth, investors

Last week the monetary policy committee (MPC) voted unanimously to keep the benchmark interest rate unchanged. As seen in Chart 1, the repo rate stands at 6.5 percent.

The decision to maintain the status quo comes against the backdrop of retail inflation, as measured by the consumer price index (CPI), coming in below expectations.

As shown in Chart 2, CPI inflation has declined from 3.7 per cent in September to 3.3 per cent in October. The decline in headline inflation can be traced to the collapse in food inflation, even as core inflation inches upwards (Chart 3).

“A large fall in food prices pushed food group into deflation and more than offset the increase in inflation in items excluding food and fuel,” noted the MPC.

Further, the recent collapse in oil prices, crude oil prices have declined almost 30 per cent since October (Chart 4) with the Indian crude basket falling to below $60 a barrel at the end of November after touching $85 a barrel in early October, is also likely to impact inflation going forward.

Additionally, as seen in Chart 4, three months ahead household median inflation expectations have also moderated, though the one year ahead expectations remain elevated and unchanged.

Accounting for these factors, the RBI has lowered its inflation forecast to 2.7-3.2 per cent in the second half of FY19 and 3.8-4.2 per cent in first half of FY20, down from its earlier forecast of 3.9-4.5 per cent in H2FY19 and 4.8 per cent in Q1FY20 (Chart 6). On the growth front, despite gross domestic product (GDP) growing slower than expected at 7.1 per cent in Q2FY19 (Chart 7), the RBI has maintained its growth forecast at 7.4 per cent for FY19 (Chart 8).

StatsGuru is a weekly feature. Every Monday, Business Standard guides you through the numbers you need to know to make sense of the headlines. Compiled by BS Research Bureau

First Published: Sun, December 09 2018. 23:22 IST