Inflation target lowered, but risks remain
The Reserve Bank of India (RBI) has lowered its inflation target for first quarter of 2019-20 to 4.8 per cent from 5% in its August statement. But the central bank has also warned about the upward risk to inflation on account of higher food and crude prices. Moreover, depressed financial market condition could also hurt investments.
Uneven rainfall across the country has added to the risks to food inflation. First advance estimates that have placed production of major kharif crops for 2018-19 higher than last year’s record, RBI said. An estimate of the impact of an increase in minimum support prices (MSPs) announced in July has been factored in by the central bank in its inflation projections. Besides, the price of the Indian basket of crude oil has increased sharply, by $ 13 a barrel, since the last monetary policy committee (MPC) resolution.
Also, international financial markets remained volatile with emerging market economies (EME) currencies depreciating significantly. Finally, the HRA effect came off its peak in June and is dissipating gradually on expected lines, RBI said. “Taking all these factors into consideration, inflation is projected at 4.0 per cent in Q2:2018-19, 3.9-4.5 per cent in H2 and 4.8 per cent in Q1:2019-20, with risks somewhat to the upside” said Governor Urjit Patel.
Both global and domestic financial conditions have tightened, which may dampen investment activity. Rising crude oil prices and other input costs may also drag down investment activity by denting profit margins of corporates. This adverse impact will be alleviated to the extent corporates are able to pass on increases in their input costs.
Uncertainty surrounds the outlook for exports. Tailwinds from the recent depreciation of the rupee could be muted by the slowing down of global trade and the escalating tariff war.
Uneven rainfall across the country has added to the risks to food inflation. First advance estimates that have placed production of major kharif crops for 2018-19 higher than last year’s record, RBI said. An estimate of the impact of an increase in minimum support prices (MSPs) announced in July has been factored in by the central bank in its inflation projections. Besides, the price of the Indian basket of crude oil has increased sharply, by $ 13 a barrel, since the last monetary policy committee (MPC) resolution.
Also, international financial markets remained volatile with emerging market economies (EME) currencies depreciating significantly. Finally, the HRA effect came off its peak in June and is dissipating gradually on expected lines, RBI said. “Taking all these factors into consideration, inflation is projected at 4.0 per cent in Q2:2018-19, 3.9-4.5 per cent in H2 and 4.8 per cent in Q1:2019-20, with risks somewhat to the upside” said Governor Urjit Patel.
Both global and domestic financial conditions have tightened, which may dampen investment activity. Rising crude oil prices and other input costs may also drag down investment activity by denting profit margins of corporates. This adverse impact will be alleviated to the extent corporates are able to pass on increases in their input costs.
Uncertainty surrounds the outlook for exports. Tailwinds from the recent depreciation of the rupee could be muted by the slowing down of global trade and the escalating tariff war.