RBI in its April policy had surprised us by scaling up the inflation trajectory by 25 bps, with 1HFY18 averaging 4.5%. But it appears that inflation may be substantially lower by ~130 bps than its projection, with the next few prints likely to be sub 3%. Even as we expect the inflation trajectory to inch towards 4.5% mark by March 2018, the 2HFY18 average will still remain much lower than the RBI’s estimate of 5%.
Further, core inflation (ex-petrol and diesel) has been trending downwards over the past six months depicting continuing growth slack. Finally, GST rates will likely lead to ~20 bps fall in CPI inflation (assuming smooth implementation and efficient input tax mechanism) with most goods’ rates broadly unchanged and in some cases lower and only a few services will see some uptick.
The upside inflation risks RBI noted in the April policy have continued to fade: (1) Crude prices have stabilized at current levels with limited meaningful near-term upside threat, (2) imported inflation risks out of FX depreciation have dissipated and on the contrary INR strength will add to the disinflationary forces. We do not see INR depreciating sharply enough through the year to impact inflation meaningfully and (3) global reflation theme is losing momentum with subsiding global volatility, with markets seeing lesser risk of upside surprise by global central banks.
via Should the RBI review its policy outlook? | Business Standard News
aniltikotekar4sme.com 