Slide in CPI all set to invite RBI’s rate cut

The Consumer Price Index’s 1.54% inflation rate recorded for June 2017 is the lowest since the start of the index in 2012. According to the CSO release, inflation rate during the month was pulled down by food prices led by vegetable items like tomatoes, pulses and potato.

This is the third month in a row that food prices brought down the CPI. The index has registered an inflation rate of 2.18% in May 2017.

Present slide in prices is well outside RBI’s predictions. The June 2017 monetary policy review which sets the inflation forecast for the coming year predicted a CPI inflation range of 2% to 3.5 per cent for the first half of fiscal year 2017-18. Now it reached 1.54% and the RBI can initiate some repo response to the new low level of CPI.

People in the government also demanded a rate cut from the central bank.

In the new rate setting format under the Monetary Policy Committee, the RBI has shown strong adherence to price stability. This means that the central banks bends to rate cuts only if signals are strong. It was not sympathetic to pro-cut calls despite the MPC is dominated by government representatives.

Even in the context of the current fall in inflation, the central bank may look to its inflation expectations survey that derived from household responses. Only if the trend from inflation expectations survey follows the CPI trend, the RBI may signal a repo rate cut. 

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