Crisil hints at status quo in RBI monetary policy

A day ahead of RBI's annual monetary policy for 2017-18, CRISIL on Wednesday saw pressures on inflation building up and said that there is a case for RBI's stance to be disinflationary which could hurt the economic growth in near term. This implies that RBI might not cut rates on Thursday.

In a research note it projected the consumer price index (CPI)-based inflation to average five per cent in 2017-18, which would be 30 basis points higher than the previous year's.

Crisil further said that the monetary policy might have to clearly articulate the glide path to rein in CPI inflation at the targeted four per cent in the medium term.

While fiscal policy and structural reforms will be as crucial in quelling incipient inflation, it will take time for the benefits to work through an enduringly lower inflation, it said.

It said inducements to inflation are indeed many in the road ahead -- pent-up demand after demonetisation, lower bank lending rates, the second tranche of payments based on the Seventh Pay Commission recommendations, and an uptick in global oil, metals and agri-commodity prices after three benign years.

Not surprisingly, the sharper-than-expected fall in inflation over the past few months has already started correcting as remonetisation gained currency.

According to the report, the currency squeeze due to demonetization, along with seasonal factors, pushed food inflation significantly down but has not had much impact on inflation excluding food and fuel.

It said that the average of CPI inflation for 2016-17 is more than 500 basis points down from the peak of ten per cent seen in 2012-13 but that hasn't convinced the RBI to cut the repo rate further. The CPI data for March, 2017 is yet to be released.

Instead, it stood pat during the February monetary policy review, and changed its policy stance from 'accommodative' to 'neutral'. This suggests that, while the battle to rein in inflation below 5% has been won, the war to bring it down to 4% on a sustainable basis has not yet been.

Possibly, the RBI is more concerned about the coming upward pressures on inflation, it said.

CPI inflation rose to 3.67 per cent in February from 3.17 per cent in the previous month, while the food part of it rose to 2.01 per cent from 0.61 per cent. 

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