Headline inflation is projected to remain soft in the near term assuming a normal monsoon in 2019, reflecting the current low level of inflation and the benign food inflation.
RBI’s monetary and credit policy statement, released today, had good news in store for people, with its assessment that the inflation in the country will remain subdued for the near term due to excess supply conditions prevailing for several food Items, lower crude prices and lower electricity prices.
Headline inflation is projected to remain soft in the near term assuming a normal monsoon in 2019, reflecting the current low level of inflation and the benign food inflation. Apart from the unusual pick up in the prices of health and education, the short-term outlook for the inflation remains low, RBI said in its sixth bi-monthly monetary and credit policy statement today.
Here are the four key factors that will shape the path of inflation in 2019-20 and keep it low in the short-term:
Food: Continued deflation across several food items, significant moderation in inflation in cereals and excess supply of several food groups in the domestic market will keep the food inflation low.
Fuel: A sharp fall in the consumption of firewood and chips in rural areas has resulted in larger than expected moderation in the fuel group. In addition, electricity prices have also shown considerable moderation.
Crude Oil: RBI expects crude oil prices to decline, as it said that the outlook on crude oil prices remains same as it was in the December policy.
Housing Rental Alliance (HRA): As the impact of increase in HRA by the 7th Pay Commission dissipates completely, RBI said that there will be a moderation in expected inflation by households as well as input and output expectations of producers.
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The projected Consumer Price Inflation (CPI) for 2019 has been revised downwards to 2.8 per cent in Q4 of 2018-19; to 3.2-3.4 per cent in the first half of 2019-20; and to 3.9 per cent in Q3 of 2019-20, with the risk centrally balanced around the central trajectory.
However, the monetary policy statement takes note of some uncertainties in the long term and recommends a careful monitoring of such events. These include reversal in vegetable prices, rise in crude oil prices, volatile financial markets, abnormal monsoon and softening global commodity prices and slowdown in global demand due to rising trade war and geopolitical uncertainties.
RBI also expects the steps taken in the union budget 2019-20 would boost aggregate demand by increasing disposable incomes, but believes that the full effect of some of these measure will only materialise over a period of time.