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What has happened?
The Reserve Bank of India’s policymakers have acted predictably in opting to keep interest rates unchanged and in retaining the ‘neutral’ stance. Price stability, after all, remains the Monetary Policy Committee’s primary remit, and trend line retail inflation continues to run above its medium-term target of a durable headline inflation reading of 4%. But as with all central bank policy statements, it is not only the action but also what is said that is closely scrutinised for clues on what may lie ahead.
Mixed messages
The RBI’s bimonthly monetary policy statement, ends up sending mixed messages as its outlook for inflation and assessment of the factors contributing to price gains are at variance.
Lower projections for CPI
- The MPC has appreciably lowered its projections for CPI (consumer price index) inflation for the fourth quarter of 2017-18, and for the new fiscal year
- It sees price gains having slowed to 4.5% over January-March, a full 60 basis points lower than the 5.1% pace it had projected in February
- Forecasts for the first and second halfs of 2018-19 have also been substantially trimmed
- Price gains in the first half are now in the 4.7-5.1% range (as against 5.1-5.6% projected in February), with inflation slowing in the second half to 4.4%
Reasons for lower projections on inflation
- Sharp decline in vegetable prices
- Significant moderation in fuel group inflation
GVA removed- switch to GDP
Gross Value Added as the main measure of economic output is replaced with Gross Domestic Product
Conclusion
While the assertion that GDP growth will strengthen this fiscal has given investors cause for cheer, the forecast of 7.4% is unchanged from the implicit projection from February. The messaging on the economy could have been clearer and more consistent.
