What the RBI’s monetary policy report says about inflation drivers, in charts | Mint

What the RBI’s monetary policy report says about inflation drivers, in charts

Despite the recent rise in crude oil prices, the central bank retained its baseline assumption of $85 a barrel for the Indian basket for the second half of the fiscal year (Photo: Mint)
Despite the recent rise in crude oil prices, the central bank retained its baseline assumption of $85 a barrel for the Indian basket for the second half of the fiscal year (Photo: Mint)

Summary

  • While core inflation has trended down, the MPC said it remains cautious about supply-side risks like the volatile vegetable prices in July and August

The monetary policy committee (MPC) on Friday unanimously agreed to keep policy rates unchanged at 6.5% but said it is “resolved to remain on high alert, given the prevailing environment of elevated global food and energy prices and global financial market volatility". Along with the policy, it also released its half-yearly monetary policy report, laying out its analysis of the macroeconomic environment. Mint delves into the specifics of the monetary policy report in five charts:

Despite the recent rise in crude oil prices, the central bank retained its baseline assumption of $85 a barrel for the Indian basket for the second half of the fiscal year. While Brent crude prices had risen to as much as $98 a barrel in September, they fell below $90 on Friday. However, oil prices are known to be volatile and if they settle above $90 for longer, the RBI's inflation projections could prove to be an underestimate.

The southwest monsoon season was an important base assumption that changed in the latest monetary policy report. The Indian economy is heavily reliant on this season, which provides 75% of the country's rainfall. According to the monetary policy report, rainfall was uneven from June to September, with August recording a 36% deficit. While it recovered in September, it ended the season 6% below the long-term average (which is classified as ‘below normal’), causing reservoir levels to fall. In the April report, the RBI had assumed a normal monsoon this year for its projections.

The RBI report showed how core inflation would have behaved if certain other volatile items were removed. Core inflation excluding food and fuel was 4.9% in October. If petrol and diesel are also removed, it would be 5.1%, suggesting they were a downward force on headline inflation. Also excluding gold and silver, it would have come down to 4.8%, which means these two precious commodities had exerted upward pressure. While core inflation has trended down, the MPC said it will remain cautious about supply-side risks like the volatile vegetable prices in July and August.

The median inflation expectations of urban households for three months ahead and one year ahead fell by 90 and 40 basis points, respectively, to 9.1% and 9.9% in the September 2023 round of the central bank’s survey. The proportion of respondents in the survey expecting the general price level to increase by more than the current rate declined considerably for both time horizons when compared with the previous round in July.

According to the monetary policy report, bank lending and deposit rates rose further in the first half of 2023-24, reflecting the lagging impact of policy rate hikes during May 2022-February 2023. In response to the cumulative 250-basis-points increase in policy rate, the transmission into deposit rates and lending rates has not panned out completely. On the deposit side, the weighted average domestic term deposit rates on fresh and outstanding term deposits rose by 233 and 157 basis points, respectively. On the lending side the weighted average lending rates on fresh and outstanding rupee loans increased by 196 basis points and 112 basis points, respectively, between May 2022 and August 2023.

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