Firming crude oil prices in the global market is likely to cast its shadow on retail inflation, which has begun to move northwards after hitting a low of 1.46% in June, and may prompt the RBI to hold interest rates in 2018.
As inflation climbed up in the month of November, even breaching the Reserve Bank of India (RBI) of 4% target, experts say that the central bank is going to take a long pause in 2018. Firming crude oil prices in the global market is likely to cast its shadow on retail inflation, which has begun to move northwards after hitting a low of 1.46% in June, and may prompt the RBI to hold interest rates in 2018.
Retail inflation may average around 4-4.5% next year, higher than an expected sub-4% level this year, experts say. The RBI too has upped its inflation projection to 4.2-4.6% by March 2018 due to firming global oil prices and uncertainty on Kharif farm output. It aims to achieve a medium-term target of 4% for retail inflation. Ranging between 0.90-6.55%, wholesale price-based WPI inflation moved in an inverted curve trajectory in 2017, PTI reported.
SBI Research Chief Economist Soumya Kanti Ghosh said inflation will be rising from this level but will remain within sub-5%. “Inflation numbers for the next couple of months could be around 4% to 4.5%. Even though the inflation average for current fiscal could be 3.5-3.7%, next year the inflation average could go up to 4.5%,” he told PTI.
But, it will still not be a major issue, Ghosh said, adding any rate action from the RBI is unlikely before the second half of 2018. “But, even if inflation goes to 5%, it will be within RBI’s inflation target of 4-6%. Crude prices are now around USD 65 per barrel that could be one source of inflation rise,” he added.
An upward adjustment in housing allowance for the government employees under the 7th Pay Commission and some pass-through of GST rates will also push prices.
RBI is likely to remain the proverbial owl — as was described by the RBI Governor a few years back when he was a deputy governor. “An owl is traditionally a symbol of wisdom. So we are neither doves (nor hawks)…but owls and we are vigilant when others are resting,” he had remarked.
“We expect the RBI to keep rates on hold this time and in February as well as the inflation is likely to remain high. The crude oil price is also hovering around $63 per barrel; the US oil price is also high,” Madhavi Arora, an economist at Kotak Institutional Equities had told FE Online before the December policy meeting.