Mumbai: The Reserve Bank on Friday lowered its retail inflation projection for the second half of the current fiscal to 3.9-4.5 per cent mainly because of an unusually benign trend in food prices.
Food inflation has remained unusually benign, which imparts a downward bias to its trajectory in the second half of the year, the central bank said in its fourth bi-monthly monetary policy unveiled here.
"Inflation is projected at 4 per cent in second quarter (July-September) 2018-19, 3.9-4.5 per cent in H2 (October-March) and 4.8 per cent in Q1:2019-20 (April-June), with risks somewhat to the upside," it added.
The Reserve Bank of India (RBI) kept the key repo rate unchanged at 6.25 per cent.
"The decision of the Monetary Policy Committee (MPC) is consistent with the stance of calibrated tightening of monetary policy in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4 per cent within a band of +/-2 per cent, while supporting growth," RBI said in a statement.
The MPC reiterated its commitment to achieving the medium-term target for headline inflation of 4 per cent on a durable basis. If the house rent allowance (HRA) impact is not taken into account, RBI expects the retail inflation based on consumer price index (CPI) to come down even further.
"Excluding the HRA impact, CPI inflation is projected at 3.7 per cent in Q2:2018-19, 3.8-4.5 per cent in H2 and 4.8 per cent in Q1:2019-20," it said.
The recent excise duty cuts on petrol and diesel will moderate retail inflation, the bank added. However, volatility in global financial markets continues to impart uncertainty to the inflation outlook.
A sharp rise in input costs, combined with rising pricing power, poses the risk of higher pass-through to retail prices for both goods and services, RBI said.
RBI said that inflation outlook needed a close vigil over the next few months as several upside risks persist. In its previous monetary policy, RBI had projected retail inflation at 4.8 per cent during the second half of this fiscal. Going forward, the inflation outlook is expected to be influenced by several factors, RBI said.
"First...Inflation in key food items such as pulses, edible oils, sugar, fruits and vegetables remains exceptionally soft at this juncture. "Secondly, the price of the Indian basket of crude oil has increased sharply, by USD 13 a barrel, since the last resolution. Thirdly, international financial markets remained volatile with emerging market economies' (EME) currencies depreciating significantly.
"Finally, the HRA effect came off its peak in June and is dissipating gradually on expected lines," it added.
RBI said that the risk to food inflation from spatially and temporally uneven rainfall is also mitigated, as confirmed by the first advance estimates that have placed production of major kharif crops for 2018-19 higher than last year's record.
An estimate of the impact of an increase in minimum support prices (MSPs) announced in July has been factored in the baseline projections.
RBI said it took all these factors into consideration while projecting inflation for the remaining current fiscal as well as the next fiscal beginning April 1, 2019.