NEW DELHI: The Reserve Bank of India on Wednesday signalled a possible reversal in the rate-tightening cycle, but said it would all depend on how the inflation outlook pans out.
In its fifth bi-monthly policy of 2018-19, the central bank maintained a status quo on the repo rate and decided to continue with calibrated tightening stance. RBI also cut its inflation projection for H2 of FY19 to 2.7-3.2 per cent from 3.9-4.5 per cent earlier.
However, in its statement, RBI said the downgraded inflation projections have some key risks.
Even though inflation projections have been revised downwards significantly and some of the risks pointed out in the last resolution have been mitigated, especially of crude oil prices, several uncertainties still cloud the inflation outlook, the central bank said.
Below are the seven uncertainties on inflation outlook as flagged by RBI:
First, inflation projections incorporate benign food prices based on the realised outcomes of food inflation in recent months. The prices of several food items are at unusually low levels and there is a risk of sudden reversal, especially of volatile perishable items.
Secondly, available data suggest the effect of revision in minimum support prices (MSPs) announced in July has been subdued so far. However, uncertainty continues about the exact impact of MSP on inflation, going forward.
Thirdly, the medium-term outlook for crude oil prices is still uncertain due to global demand conditions, geo-political tensions and Opec decision, which could impinge on supplies.
Fourthly, global financial markets continue to be volatile.
Fifthly, though households near-term inflation expectations have moderated in the latest round of the Reserve Banks survey, one-year ahead expectations remain elevated and unchanged.
Sixthly, fiscal slippages, if any, at the centre/state levels, will influence the inflation outlook, heighten market volatility and crowd out private investment.
Finally, the staggered impact of HRA revision by state governments may push up headline inflation. While MPC will look through the statistical impact of HRA revisions, it will be watchful of any second-round effects on inflation.