Inflation trajectory may see a declining trend with December CPI reading likely to be sub 4 per cent largely due to good monsoon.
“Our recent projections indicate that December 2016 CPI reading will be sub-4 per cent while at least 4-5 readings in FY17 will be sub 4.5 per cent,” SBI Research said in its Ecowrap report.
The decline in inflation trajectory is expected to be driven by several factors like fall in pulses prices, projection of above normal monsoon, among others.
“From historical data, it can be inferred that there is a clear downside of at least 60 basis points to headline CPI numbers over the medium-term,” the report said, adding that this alone will pull down CPI to sub-4.5 per cent.
The distribution of core CPI over the last 20 months indicates a nicely shaped Bell curve, with mean CPI at 4.5 per cent, it added.
Meanwhile, the projection of ‘above-normal’ monsoon for the current year will boost agricultural production in the country which will subsequently bring down the food inflation.
According to the report, WPI is expected to be greater than CPI. However, the difference will be not so significant and though WPI will be greater than CPI, both will possibly move in tandem, sans any global volatility.
On RBI’s monetary policy stance, the report said the central bank is expected to go for a 50 basis points cut in key policy rates this fiscal.
“We are still maintaining a 50 bps repo rate cut in FY17, though we believe RBI may go more aggressive on liquidity for rate transmission in Q2FY17,” it said.
The next policy review meet is scheduled to be held on October 4. It would also be the first review under the new RBI Governor Urjit Patel, who assumed charge effective September 4 after the end of his predecessor Raghuram Rajan’s three-year tenure.
Rajan had faced a lot of criticism for his reluctance to cut rates, though he always maintained that the rates were lowered at every given opportunity.