RBI Watch: CPI inflation forecast cements view rate cut cycle over

Informist, Wednesday, Apr 7, 2021


By Siddharth Upasani


The inflation forecasts released today should put to bed any hopes of the Monetary Policy Committee resuming its rate cut cycle in the coming months.


As per the Reserve Bank of India's revised forecasts, the current financial year will end with CPI inflation averaging above 5.0% in the last quarter.


Inflation is expected to average 5.2% in the first half of 2021-22 (Apr-Mar), before easing to 4.4% in Oct-Dec. This is marginally higher than the previous forecast.


However, it is the new estimate for the one-year-ahead period that might seal the fate of the easing cycle, which was kept alive until December by comments on the policy space available to support growth.


In the first quarter of 2022, CPI inflation is seen averaging 5.1%, well above the medium-term target of 4.0%.


When asked in the post-policy media briefing if the repo rate would now remain at 4.00%–seen by many as the terminal rate–Deputy Governor Michael Patra tried his best to allay any such fears.


"Everything is on the table. Nothing is withdrawn, nothing is said no to. All options are open to the RBI. And we remain flexible on all fronts," Patra said, providing a suitably open-ended answer.


Everything, however, is probably not on the table.


In February, the committee dropped the language from its statement which mentioned the availability of further policy space to support growth. This language was introduced in August and modified accordingly in October and December, as per the evolution of the inflation trajectory. And today's forecasts provide little reason to think any policy space may emerge in the next one year. If anything, economists see further upside risks to the forecast, given rising commodity prices.


Inflation, though, is unlikely to be the top priority in 2021-22 given the state of economic growth. But even beyond March 2022, glimpses of the promised land don't seem to be on offer.


According to the Monetary Policy Report released today, the RBI's models see CPI inflation in the range of 4.5-4.8% in 2022-23 even after assuming normalisation of supply chains, a normal monsoon, and no major exogenous or policy shocks. It would not be outrageous to say this is probably the best-case scenario.


There is much to be said on why 4.00% might be the terminal repo rate in the minds of market participants. The RBI, of course, will not want to commit to a floor and tie its own hands. But its inflation forecast might be saying so on its behalf.  End


Edited by Subham Mitra


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