CPI inflation to remain above 7 per cent till Q2 of FY16: RBI

While India Inc and borrowers are eagerly waiting for the much-anticipated rate cut, a Reserve Bank of India survey has said the core CPI (consumer price index) inflation, excluding the food and fuel component, is expected to remain sticky till the second quarter of 2015-16.

“The headline CPI inflation is forecasted to remain above 7 per cent till the second quarter of FY16. Headline CPI inflation is expected to increase to 8 per cent during Q4 of 2014-15 and is then likely to decline to 7.4 per cent in Q2 of 2015-16,” the RBI’s Survey of Professional Forecasters has said.

CPI inflation declined to 4.38 per cent in November and bond yields fell below 8 per cent recently amid expectations of a rate cut.

The survey started collecting the forecasters expectations on medium and long-term CPI headline inflation from the December 2013 round.

During this five round, both 5-year and 10-year annual average CPI inflation expectations have declined. The consumer price inflation expectation has mostly remained higher than the WPI inflation expectation.

The forecast of 5-year annual average CPI inflation was at 7.8 per cent in the December 2013 round and subsequently reduced to 7 per cent in the May 2014 round.

The forecasters further cut down their medium term inflation expectation by 50 basis points to 6.5 per cent in the September 2014 round, said the survey which was released by the RBI last week.

For the September 2014 round, both the median and the first quartile were same at 6.5 per cent, suggesting that majority of the forecasters are expecting the medium term CPI inflation at around 6.5 per cent. In the with the medium term CPI inflation expectation, the long-term 10-year inflation expectation also declined during the five surveys conducted from December 2013 to September 2014.

The long-term inflation expectation which was at 7 per cent in the December 2013 round was reduced to 6.5 per cent in the May 2014 round and further to 6.0 per cent in the July 2014 round, the RBI survey said.

In his post-policy meeting with media, RBI Governor Raghuram Rajan had said there is still some uncertainty about the evolution of base effects in inflation, the strength of the on-going disinflationary impulses, the pace of change of the public’s inflationary expectations, as well as the success of the government’s efforts to hit deficit targets. “A change in the monetary policy stance at the current juncture is premature,” he had said. “However, if the current inflation momentum continues, and fiscal developments are encouraging, a change in the monetary stance is likely early next year including outside the policy reviews cycle,” he had added.

The RBI has been saying it wants to get more certainty about the pace of the disinflationary processes and get a little more sense of some developments on the fiscal front, etc. As of now, this is why the RBI stance remains unchanged.

“We are well set at this point but as the information comes in, our sense is that if it goes according to expectations, it will be towards monetary accommodation, the stronger the information the sooner the accommodation,” he had said.