The inflation data release was the most important event in banking last week. Inflation, as measured by the consumer price index (CPI), decreased below 6 percent in March, as predicted. Why the decline?
The decline in inflation to 5.7% is attributable to two factors. One, a favourable foundation effect Second, reducing dietary costs On a year-over-year basis, food prices decreased (4.8% vs. 6%), while they inched up sequentially (0.3 percent). Cereal prices, which have been fueling the recent rise in food inflation, are expected to decline substantially in the future, aided by government interventions, according to some economists.
The Monetary Policy Committee (MPC) is likely to take a break in June if the inflation rate in April falls within the range of 4.8 percent to 4.9 percent. This will be a significant rationale for this. Beyond that, monsoon distribution and the behaviour of global crude prices will determine the outcome.
If inflation does not surprise to the upside and remains below 6 percent, the MPC could remain on hold for the remainder of the year, with the possibility of a rate cut by year’s end.
OIL Prices
However, oil prices are a distinct concern. Due to recent supply reductions by oil producers, the International Energy Agency (IEA) has cautioned that crude oil prices may rise. There is concern that crude may soon reach $100 per barrel. If this occurs, the MPC’s inflation projections may be at risk.
The monsoon is the second season. In contrast to the private forecaster, Skymet, the India Meteorological Department has predicted a normal monsoon. A weak monsoon distribution could have negative price effects.
The Reserve Bank of India (RBI) appears to have already adopted an informal growth-friendly stance. The policy’s language and tone suggest that it will no longer wage an all-out war on inflation. The MPC has set a high threshold for future rate increases by pausing in March despite two consecutive months above the upper band of six percent. Consequently, the probability of a rate increase only arises if inflation exceeds those levels.
Given the available data indicators and the anticipated decrease in inflation for April, a suspension in the June policy is almost certain. Beyond this, the oil price and monsoon precipitation hold the key.
