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The sharp slowing of retail inflation in April has taken most economic forecasters by surprise. Much of this was because of the collapse in the price of pulses. Vegetable prices also fell. What is perhaps more important for monetary policy is that core inflation, which is closely tracked by members of the monetary policy committee (MPC), fell below the 5% mark. Core inflation excludes food and fuel.
It is, thus, no surprise that bond yields also declined by 10 basis points on Monday, the first day of trading after the release of the new inflation data at the end of last week.
The Reserve Bank of India (RBI) is now almost certain to come under pressure to cut policy rates later this month. The central bank had taken the markets by surprise in February by changing its policy stance from accommodative to neutral.
A neutral policy stance does not rule out a rate cut. The more important question is whether the MPC believes that inflation is now below target on a sustainable basis or not.