Goods and Service tax (GST) implementation will have a modest impact on the CPI inflation, ICRA said on Monday. It also added that Reserve Bank of India (RBI)’s Monetary Policy Committee (MPC) will keep the repo rate unchanged in the upcoming policy review in June 2017 on the back of progress of monsoon and GST transition. However, the tone of the policy statement is expected to be far less hawkish than the April 2017 statement as well as the minutes of the MPC’s April 2017 meeting, given the ebbing of some inflation risks in the intervening period.
Naresh Takkar, managing director and Group CEO, ICRA, said: “The CPI inflation has remained below 4%, i.e. the medium term target, for six consecutive months. Moreover, several of the inflation risks highlighted by the MPC in April 2017 have subsequently abated, with the improved outlook for the monsoon, rate structure of the goods and services tax (GST) and easing of commodity prices. At the same time, there is a visible improvement in volume growth in a number of sectors post-remonetisation, although a broad-based revival in private sector investment remains elusive.”
The year-on-year (YoY) CPI inflation eased sharply to a series-low 3.0% in April 2017, led by food inflation. Moreover, the core-CPI inflation (excluding food & beverages and fuel & light) declined to 4.5% in April 2017 from 4.9% in March 2017.
“Factoring in the Indian Meteorological Department’s monsoon projection, the expectation of a moderate hike in MSPs, stable global commodity prices and a modest weakening of the rupee, ICRA expects the CPI inflation in FY2018 to average 4.0-4.3%, lower than its earlier assessment of 4.5%, while exceeding the 4% level being targeted by the MPC. Nevertheless, the CPI inflation is likely to slope up over the course of the fiscal, partly on account of an unfavourable base effect in the later months, similar to the direction that the MPC had indicated in the last policy review,” ICRA said.
On food inflation outlook, ICRA said that improved monsoon have weakened the concerns, however, dip in reservoir levels and extent of revision in minimum support prices (MSPs) remain modest inflation risks. The trajectory for food inflation is expected to be relatively benign in H1 FY2018. However, a reversal of base effects could result in food inflation rising sharply to 4-5% during H2 FY2017.
Revenue Secretary Hasmukh Adhia had last week said that inflation will come down by two per cent after GST implementation. He said, “I don’t think inflation will at all go up because of GST. We have taken special care to ensure inflation does not go up. Our internal estimate is that after the rates are decided, inflation should come down by two percent.”
ICRA said housing inflation would be pushed up after the imminent revision in house rent allowance based on the Seventh Central Pay Commission’s recommendations. Rural wage inflation rose sharply to 6.6% in January 2017 from 6.0% in December 2016, despite the expectation of loss of jobs in urban less-formal sectors pushing migrants to return to their villages. Subsequently, rural wage inflation has dipped marginally to 6.4% in March 2017, suggesting stickiness in wages going forward.
In April 2017, the MPC had indicated that it expects the CPI inflation to average 4.5% in H1 FY2018, before rising to 5.0% in H2 FY2018, with risks evenly balanced around this projected trajectory. With greater emphasis on bringing inflation in a durable manner to 4.0%, i.e. the mid-point of the CPI inflation band of 2.0-6.0%, ICRA expects the MPC to maintain status quo on the repo rate in the June 2017 policy review. Nevertheless, given the easing of some inflation risks, the MPC may revise its CPI inflation outlook for FY2018 in the upcoming policy meeting. Additionally, the MPC may revisit its growth forecast of 7.4% for FY2018, following the release of the updated FY2017 growth figures by the Central Statistics Office on May 31, 2017.