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Business News/ Market / Mark-to-market/  Food inflation main obstacle to RBI’s rate cut decision
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Food inflation main obstacle to RBI’s rate cut decision

The possibility of a rate cut arises only if the consumer inflation rate reaches a level of 6% or below by January 2016

Photo: Pradeep Gaur/MintPremium
Photo: Pradeep Gaur/Mint

The Reserve Bank of India’s (RBI’s) inflation projections, presented in its monetary policy report on Tuesday, quickly diminish any hopes of a rate cut any time soon. It has forecast the baseline consumer inflation rate at 7% for January to March 2016.

But the possibility of a rate cut arises only if the consumer inflation rate reaches a level of 6% or below by January 2016. The September monetary policy said, “The future policy stance will be influenced by the Reserve Bank’s projections of inflation relative to the medium-term objective (6% by January 2016), while being contingent on incoming data."

The central bank also reiterated that risks to meeting the 6% target are still on the upside, even if somewhat lower than what they were in August. Basically, while lower oil prices, a stable currency and a reduced pace of wage growth have helped, there is a lot of uncertainty on food prices.

RBI’s own scenario analysis suggests that a favourable food shock would give a big boost towards meeting the 6% target (see chart). To be sure, a lot of other things will have to be favourable as well—from exchange rates to global commodity prices to the government’s fiscal discipline, but a meaningful correction in food prices remains the key.

While some economists remain confident that the government’s recent measures to address food-supply bottlenecks will help lower food prices, given recent experience, this still remains iffy. Apart from structural reforms, big investments are needed to solve these problems and a smaller increase in minimum support prices for cereals in itself might not be enough.

The lowered advance estimates for the kharif harvest, owing to poor and unevenly spread rainfall this year, alone is an indicator of risks to food prices.

Note also that the US rate hike, which is expected sometime next year, will also reduce the headroom for RBI to cut rates locally. Thus, not only has the possibility of a rate cut advanced further ahead in the future; if anything, the next move could well be a rate hike.

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Published: 01 Oct 2014, 01:11 AM IST
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