The RBI last month raised inflation forecast for this fiscal to an average of 5.7%, higher than the earlier projection of 5.1%, noting that the current trend can be looked through as it is driven by exogenous and largely temporary supply shocks
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NEW DELHI :
Retail inflation further eased in August to a four-month low of 5.3% on the back of softening food prices and a favourable base effect. This may allow the Reserve Bank of India (RBI) to keep interest rates low amid a nascent economic recovery.
Food inflation decelerated to 3.11% in August from 4% in July as vegetable prices contracted 11.7% during the month, though inflation for protein items such as edible oils (33%), pulses (8.8%), eggs (16.3%) and meat (9.2%) remained elevated, data released by the statistics department showed.
Fuel and fuel inflation (12.95%) increased and services inflation also remained high at 6.4% in August.
Core inflation excluding food and fuel prices rose by a slower 5.5% in August against 5.7% in July.
Favourable base effects are expected to soften inflation readings to sub-5% in the fourth quarter of 2021, lending downside risks to RBI’s projection for this quarter and the next, said Radhika Rao, economist, DBS. “The inflation tailwind will allow the central bank to remain accommodative at the October policy review, with a bigger focus on liquidity management via absorption measures. On a sequential basis, pipeline forces remain under watch, particularly because of the domestic fuel tax rigidity, service reopening gains and passthrough of higher costs on account of supply bottlenecks alongside firm input prices," she said.
RBI last month raised the inflation forecast for this fiscal to an average of 5.7%, higher than the earlier forecast of 5.1%, noting that the current trend can be looked through as it is driven by “exogenous and largely temporary supply shocks".
Softening of inflationary pressures within the envisaged trajectory and encouraging trends in credit growth bode well for revival of consumer and business sentiments in the economy, the Union finance ministry said in its latest Monthly Economic Review released last week.
The central bank kept interest rates on hold for the seventh straight time to support the economy reeling from the pandemic, even as a split appeared among monetary policy committee (MPC) members over retaining the easy-money policy amid an inflation surge. MPC in August kept the repo rate or the rate at which banks borrow from RBI, unchanged at 4%.
Growth continues to be a priority for the central bank, despite the spike in inflation. RBI retained the growth forecast for this fiscal at 9.5% amid fears of a third wave of the pandemic.
Policy normalization could start in February 2022, with a change in the monetary policy stance from accommodative to neutral, followed by a hike in the repo rate of 25 basis points each in the April 2022 and June 2022 meetings, said Aditi Nayar, chief economist at credit rating agency Icra Ltd. “Once the lift-off starts, we believe MPC will stagger rate increases over a period of time, instead of immediately trying to push real interest rates back into the positive territory," she said.
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