Monetary policy: RBI cuts inflation forecast for H1FY19 to 4.7-5.1%

The RBI Monetary Policy Committee (MPC) on Thursday cut the consumer price index (CPI) inflation forecast for the first half of FY19 to 4.7-5.1 percent from the previous estimate of 5.1-5.6 percent, including the  including the HRA impact for central government employees, with risks tilted to the upside.

After excluding the impact of HRA revisions, the MPC projected CPI inflation at 4.4-4.7 percent in the first half of FY19 and 4.4 percent in the second half.

The monetary policy committee stated that it took several factors such as moderation in food prices, international crude oil prices, the statistical impact of an increased HRA for central government employees and domestic demands into account while calculating the inflation.

"Remain congnizant of upside risks to food inflation arising out of deficient monsoon," RBI Governor Urjit Patel said during the meet, adding that the Committee is now data dependent and is monitoring inflation continuously.

The committee kept the repo rate unchanged at 6 percent to meet the inflation target of 4 percent in the medium term.

Also read — Status quo likely in RBI policy, but outlook matters more than the action

Considering the actual inflation outcomes in January-February averaged at 4.8 percent and moderating vegetable prices, the MPC  projected inflation in the fourth quarter of FY18 at 4.5 percent.

Retail inflation, measured by the year-on-year change in the CPI, fell from a high of 5.1 percent in January to 4.4 percent in February due to a decline in inflation in food and fuel.

Excluding the estimated impact of an increase in the house rent allowances (HRA) for central government employees under the 7th central pay commission (CPC), the headline inflation for February was at 4.1 percent.

Food inflation declined by 120 basis points (bps) in February, pulled down by a sharp decline in vegetable prices especially of onions and tomatoes, along with continuing deflation in pulses. The fall in prices was also observed in other food components such as eggs, sugar, meat and fish, oils, spices, cereals and milk.

Also read — RBI monetary review: An uneventful policy, but an eventful press conference?

With respect to liquefied petroleum gas, inflation declined in line with international price movements, however, inflation in the transport and communication increased in February on account of the rise in petroleum product prices and transportation fares. Rate of increase in prices of other fuel sources such as firewood and chips, and dung cake moderated.

CPI inflation excluding food and fuel remained unchanged at 5.2 percent for the third consecutive month in February, after rising from its trough in June 2017.

Among its constituents, housing group inflation rose significantly, reflecting the impact of HRA increase for central government employees. Excluding the HRA impact, inflation in this group was at 4.4 percent.

Also read — Rate sensitive stocks surge ahead post RBI policy announcement

Inflation either eased or remained at a low level in other major sub-groups such as household goods and services, recreation and amusement, education, and personal care and effects in February .

The monetary committee also noted several uncertainties surrounding the baseline inflation path including the impacts of revised MSP formula, revamped HRA, chances of fiscal slippage, monsoon, input and output prices and volatility in crude prices.

While the exact magnitude of impact of increased MSP will be known in the coming months, HRA revisions by various state governments may push headline inflation up.

"While the statistical impact of the HRA revisions will be looked through, there is a need to watch out for any second round effects," the Committee said.

Als0 read — RBI Policy Meet: Key takeaways from MPC's bi-monthly monetary policy review

The Committee pointed out risks of fiscal slippages. It stated that any further fiscal slippage from the Union Budget estimates for 2018-19 or the medium-term path could adversely impact the outlook on inflation.

"There are also risks to inflation from fiscal slippages at the level of states on account of higher committed revenue expenditure," the MPC statement read.