“Because we took a very calibrated approach, today we have an inflation which is slightly above the tolerance limit, but which is constantly being worked at so it can be brought down,” Reuters quoted Sitharaman as saying.
India’s annual retail inflation for March rose at the slowest pace in nearly 15 months and was below the central bank’s upper tolerance level for the first time this year, on the back of softer food prices.
Inflation was expected to average 5.2 per cent in the current fiscal year, well above the medium-term target of 4.0 per cent, according to a separate Reuters poll.
In an attempt to rein in the prices, the Reserve Bank of India (RBI) has so far hiked the benchmark repurchase rate by 250 basis points cumulatively since May 2022. In the last fiscal, which ended March 31, RBI projected average annual retail inflation at 6.5 per cent.
In a surprise move, the Monetary Policy Committee (MPC) recently decided to keep repo rate unchanged at 6.50 per cent. At the press conference after the policy announcement, RBI Governor Shaktikanta Das said that the move “is a pause and not a pivot” because “MPC wanted to assess the impact of the cumulative 250 basis points hike in the policy rates since May last”.
Deputy Governor Michael Patra chipped in to reiterate that the pause is “valid only till 10 am on June 8, 2023, when the Governor will announce the next policy”.The RBI in this meeting marginally cut retail inflation projection to 5.2 per cent in the current fiscal, but flagged adverse climatic conditions and rising uncertainty in international financial markets as future risks.
Although the expectation of a record Rabi harvest bodes well for easing of food price pressures, milk prices are likely to remain firm going into the summer season due to tight demand-supply balance and fodder cost pressures, RBI said.
Aditi Nayar, the chief economist & head of research at Icra Ratings, said financial stability concerns appear to have pre-empted the move as MPC assesses the impact of its cumulative 250 bps of rate hikes. “But if inflation does not fall in line with MPC assessment for Q1FY24, another hike could be in the offing, especially if the financial stability situation stabilises.”
“Broad base softening of prices has contributed to fall in inflation, which is a good news. We are expecting inflation to fall below 5% in Q1 FY24 due to base effect. However, since the number is more or less inline with the expectation, we are not expecting any material impact on yields. 10 year should trade in a narrow band of 7.15-7.35 over next couple of months,” said Ritika Chhabra- Quant Macro Strategist – Prabhudas Lilladher PMS.
(With inputs from agencies)