The Monetary Policy Committee (MPC) headed by the Reserve Bank of India Governor Urjit Patel Wednesday voted 5 to 1 in favour of a status quo on the repo rate keeping it unchanged at a near 6 and half-year low of 6.25 percent.
However, the central bank lowered the headline inflation expectation for FY18 to 2.0-3.5 percent for the first half and 3.5-4.5 percent for the second half.
Here are 5 reasons why the RBI cut inflation target.
> In April 2017, the MPC had indicated it expects the CPI inflation to average 4.5 percent in H1 FY2018, before rising to 5.0 percent in H2 FY18, with risks evenly balanced around this projected trajectory. However, the year-on-year (YoY) CPI inflation eased sharply to a series-low 3.0 percent in April 2017, led by food inflation. The core-CPI inflation (excluding food & beverages and fuel & light) declined to 4.5 percent in April 2017 from 4.9 percent in March 2017.
The sharp fall in food inflation was brought about by a deflation in the prices of pulses and vegetables. In addition, moderation in the prices of cereals, eggs, oils and fats and spices contributed to the loss of momentum. In the case of pulses, the large-scale augmentation of supply on account of expansion in acreage, procurement, buffer stocking and imports caused a sharp decline in prices starting in August 2016. Propelled by significantly higher arrivals in mandis relative to the seasonal pattern, prices of vegetables also fell markedly from July and bottomed out in January 2017, with fire sales during the demonetisation period accentuating the fall, the RBI release said.
> Extension of production cuts by the OPEC and some non-OPEC countries was offset by higher output from Canada and the US and failed to lift crude prices, which fell to five-month lows in early May. On the other hand, non-fuel commodities like metals saw prices retreating on expectations of weak demand from China. Bullion prices stayed range-bound, while food prices eased in April before rising a bit in May.
According to the RBI, these developments suggest the inflation outlook is relatively benign for advanced as well as emerging economies.
> There was sequential moderation in the manufacturing purchasing managers’ index (PMI) in May as employment contracted and new orders, both domestic and exports, slowed down.
> Inflation in respect of services embedded in transport and communication, education, recreation and health also moderated.
> The strength in the rupee added to disinflationary forces, but a big reversal is unlikely given there is heightened interest of global liquidity for India.