Why RBI cut rates: inflation scenarios played a benign beat
Barring the wage hikes to govt employees, most scenarios seem to suggest inflation could remain around the central tendency of the 2-6% inflation band mandated by government
The Reserve Bank of India (RBI) expects the Consumer Price Index (CPI)-based inflation to rise marginally to 5.3% by March 2017 and then start slipping to 4.5% by the end of fiscal year 2018.
To this baseline case, the central bank has applied different shocks such as rise in crude oil prices, further fall in global economic growth, resolution of structural food supply issues domestically and implementation of pay commission recommendations on retail inflation, as detailed by this chart from the monetary policy report.
Barring the wage hikes to government employees, most other scenarios seem to suggest that inflation could remain around the central tendency of the 2-6% inflation band mandated by the government, a big comfort to RBI and also the main reason why the central bank grabbed the room for a rate cut on Tuesday.