Falling inflation creates space for RBI to keep interest rates unchanged for now

Analysts have already begun to lower their inflation forecasts for the entire year. This will create the space for an extended pause by the monetary policy committee

In its last meeting, the monetary policy committee had voted unanimously to keep the benchmark repo rate unchanged at 6.5 per cent. The decision was driven by the then prevailing global financial uncertainty and the need for the committee to assess the impact of the policy tightening carried out so far.

as measured by the consumer price index, has continued to trend lower, aided by a favourable base effect. Inflation, which had edged above the Reserve Bank of India’s inflation targeting framework in January and February, falling thereafter to 5.66 per cent in March, declined further to an 18-month low of 4.7 per cent in April. Some analysts are now projecting inflation to remain below 5 per cent over the coming few months as well, lower than the 5.1 per cent (for the April-June quarter) forecasted by the RBI in the last monetary policy committee meeting.

The latest data points towards a sequential easing of price pressures across most categories. The consumer food price index fell to 3.84 per cent in April, down from 4.79 per cent the month before. The decline was driven by vegetables, oils and fats, and meat and fish. However, cereals and milk inflation remain elevated. A decent rabi harvest, notwithstanding unseasonal March rains, has ensured enough procurement by the government to limit any further inflationary pressures. However, concerns over monsoon rainfall on account of El Nino persist. Alongside the steep fall in food inflation, core inflation, which has tended to be more sticky in nature, has also declined. Some analysts have estimated core inflation to have fallen to 5.1 per cent in April. However, in several categories such as personal care and effects, clothing and footwear, and some household goods and services, inflation continues to remain elevated.

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