Retail inflation can remain above seven per cent till March and given this, the RBI can maintain the policy rate at the current level.
In view of the rise in the prices of vegetables, inflation based on the Consumer Price Index (CPI) in January can go above 8 percent. However, it is expected to soften after that. This has been said in a report of the research unit of State Bank of India. SBI Research’s report Ecorap has also stated that retail inflation may remain above seven per cent till March and in view of this, RBI can maintain the policy rate at the current level.
In this report released on Tuesday, it is said that if inflation in food items does not decrease, then we can go into a situation of stagnation, where inflation is high with economic growth remaining weak.
Retail inflation set a new record in December
It is noteworthy that the retail inflation rate released on Monday jumped to 7.35 percent in December 2019. It was 5.54 percent in November last month. According to the report, the main reason for the rise in inflation is the significant rise in prices of onion, potato and ginger. Apart from this, due to increase in telecom duty, inflation has an impact of 0.16 per cent. The report said that in view of this, CPI-based inflation rate may go up by 8 percent this month. However, the situation is likely to improve after that.
According to EcoRap, “However, given the rise in inflation, the Reserve Bank may be forced to reconsider the inflation and growth projections. But in our view, a change in attitude would be undesirable. The reason for this is a significant reduction in consumption. ”The report said that the Reserve Bank had a good chance of cutting the policy rate in December. At that time, inflation was 4.62 percent in October.
Expect softening after September 2020
Regarding the moderation in the inflation rate, it has been said in the EcoRap, “It is expected to soften after September 2020. From December 2020 to January 2021, gross inflation can come down to below 3 per cent. This means that the RBI can maintain the status quo in 2020. “The RBI mainly considers CPI-based inflation when considering monetary policy. The central bank will present a monetary policy review on 6 February.
It has also been said in the report that in view of the rise in the price of vegetables, inflation rate of food items like eggs, meat and fish may increase in the coming time. The reason for this is that people can increase consumption of dal, egg, meat instead of expensive vegetables, due to which their prices can increase.
How to calculate CPI should be reconsidered
The emphasis is on rethinking the way CPI is calculated in EcoRAP. It states, “The Central Statistics Office (CSO) uses the CES (static elasticity of substitution) survey”. With this, CPI-based inflation is increasing by 2 percent. This method needs to be considered in the CPI estimates.
Will remain 5% in FY 2019-20
According to the report, inflation may remain high at the rate of about 7 percent in the remaining period of the current financial year. In the financial year 2019-20 it will be 5 percent on average. It added, “We believe that the RBI can maintain a consistent position on the monetary policy front throughout 2020 as inflation may remain above 6 per cent by June-July 2020”. The moderation in economic growth and higher In view of inflation, it will not be easy for the RBI to take a decision on the policy rate front. According to the advance estimate of CSO, the country’s economic growth rate can be 5 percent in 2019-20.