The Reserve Bank may be going all-out to bring down inflation to 4 per cent, but it probably “cannot do so sustainably” as health and education prices will keep the consumer price index (CPI) above the targetted level, says a report.
According to global financial services major HSBC, even if food inflation settles at a lowly 4 per cent, it will not be enough to take headline inflation all the way down to 4 per cent.
“Something more is needed”, it said.
“…supply side bottlenecks in health and education may not allow inflation to fall to 4 per cent,” HSBC said in a research note adding that the government will have to drive meaningful reforms in these sectors.
On RBI’s policy stance, the report is clear that “if only RBI is convinced that inflation continues to fall gradually, it will find space to cut rates”.
Three government decisions over the next few weeks — the GST rate, Seventh Pay Commission housing allowance and the fiscal trajectory — progress on food reforms and the pace of recovery will determine if “the direction is comforting”, the report said.
For now, HSBC expects RBI to deliver a 25-bps rate cut at its December meeting on the back of growing comfort that 5 per cent by March, the intermediate inflation target, is likely to be met.
The monetary policy committee (MPC), which has three members nominated by the government and the rest from RBI, lowered repo rate to 6.25 per cent from 6.50 per cent at the end of two-day deliberations on October 4.
Its next meeting is due on December 6-7.