Moneycontrol
Last Updated : Jun 07, 2018 09:30 AM IST | Source: Moneycontrol.com

See consumer inflation at 4.6% in FY19, may rise to 4.9% on rising crude prices: Icra

The committee highlighted that domestic economic activity has displayed a sustained revival in recent quarters and noted that the output gap has nearly closed.

CPI inflation for first half of 2018-19 estimated in the range of 5.1-5.6 per cent. Second half inflation estimated at 4.5-4.6 percent, with risks tilted to the upside.
CPI inflation for first half of 2018-19 estimated in the range of 5.1-5.6 per cent. Second half inflation estimated at 4.5-4.6 percent, with risks tilted to the upside.

Aditi Nayar

The June policy review was widely awaited, with likely three outcomes of a pause, a change in stance to the withdrawal of accommodation and a pre-emptive rate hike, generating much interest in the likely voting patterns of individual Monetary Policy Committee (MPC) members.

Of these three options, a 25 basis points (bps) rate hike emerged as the unanimous outcome, surprising markets and resulting in a modest uptick in bond yields.

The repo rate hike was prompted by a rise in headline and core CPI (Consumer Price Index) inflation in April, the hardening of inflationary expectations in May and the risks emanating from higher crude oil prices and a weaker rupee against the dollar.

Based on these factors, the MPC sharply raised its consumer inflation projection H2 FY19 to 4.7 percent from 4.4 percent. Nevertheless, retention of the neutral stance instead of a shift to withdrawal of accommodation suggests that future rate hikes would be data dependent. It left its GDP (gross domestic product) growth forecast unchanged at 7.4 percent for FY19, a considerable rebound from the 6.7 percent recorded in FY18.

The committee highlighted that domestic economic activity has displayed a sustained revival in recent quarters and noted that the output gap has nearly closed.

However, it projected a mild dip in GDP growth from 7.5-7.6 percent in H1 FY19 to 7.3-7.4 percent in H2, with risks evenly balanced.

A waning of the favourable base effect related to demonetisation and the transition to the Goods & Service Tax regime is likely to weigh upon economic growth in H2 FY19, notwithstanding the expected back-ended broad-basing of the investment recovery.

ICRA’s baseline projection foresees average CPI inflation to rebound by 100 bps to 4.6 percent in FY19. If the average price of the Indian crude oil basket climbs to $80 per barrel in FY19, and higher prices are completely passed through to the domestic fuel prices, we expect CPI inflation to increase to around

4.9 percent in FY19, unless central and state taxes are reduced.

If this scenario materialises and is accompanied by a firming up of risks related to food prices and fiscal outcomes, it could prompt a back-ended rate hike by the MPC in H2 FY19.

Disclaimer: The author is Principal Economist, ICRA. The views and investment tips expressed by investment experts on moneycontrol.com are her own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
First Published on Jun 7, 2018 09:30 am
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