The government is planning to set an inflation target of 4% for the coming five years, an idea that has found consent with outgoing RBI governor Raghuram Rajan as well. The Consumer Price Index (CPI) inflation target is likely to be put out as a parliamentary notification. A plus or minus 2 percent range would be given, in line with what was agrees with Rajan. Meanwhile, progress on forming the new Monetary Policy Committee is being made and candidates have reportedly been shortlisted for the six-member MPC. The panel, however, will not likely be formed before the RBI’s monetary policy review on August 9.
With monsoon being above average, and inflation being within RBI’s projected range, most market experts and economists are of the view that Raghuram Rajan, in his last monetary policy review, will cut key rates by 25 basis points. Rajan’s term comes to an end on September 4, 2016. In his June review, Rajan had said, “The inflation projections given in the April policy statement are retained, though with an upside bias. Considerable uncertainty surrounds these projections, which should be clarified by incoming data in the next few months.” “Capacity utilisation indicators suggest that the available headroom in industry could keep output prices subdued even as demand picks up. Nonetheless, there are upside risks – firming international commodity prices, particularly of crude oil; the implementation of the 7th Central Pay Commission awards which will have to be factored into projections as soon as clarity on implementation emerges; the upturn in inflation expectations of households and of corporates; and the stickiness in inflation excluding food and fuel,” Rajan had added.
Given the uncertainties, the Reserve Bank had maintained status quo on rates, but had said that the stance of monetary policy remains accommodative. The Reserve Bank will monitor macroeconomic and financial developments for any further scope for policy action, Rajan had said.