Based on its inflation trajectory projection, State Bank of India's economic research department (ERD) believes that rate hike by the Reserve Bank of India (RBI) is now off the table in FY19. However, it cautioned that continued deceleration in food prices, particularly in rural areas, remains a serious cause for concern and could open up Pandora’s box in an election year.

Retail inflation as measured by the Consumer Price Index (CPI) nudged up a tad to 3.77 per cent in September against 3.69 per cent in August. However, core CPI inflation (overall CPI minus volatile components such as food and energy) declined to 5.81 per cent in September 2018 from 5.92 per cent in the previous month. “We expect CPI for FY19 at 4.2 per cent. Our inflation trajectory projection makes us believe that rate hike is now off the table in FY19,” said Soumya Kanti Ghosh, Group Chief Economic Adviser, SBI, in the ERD's research report ‘Ecowrap’.

Underscoring that continued deceleration in food prices particularly in rural areas remains a serious cause for concern and could open up Pandora’s box in an election year, the report said the MSP (minimum support price) pass through is still negligible.

The ERD team opined that the government needs to ensure that the procurement plan is implemented aggressively ahead of the Kharif season. “Till date, we are not witnessing enough traction of such and news reports suggest that the considerations of additional budget provisions for MSP is still being considered,” the report said.

Referring to the International Monetary Fund recently revising its global economic growth forecasts for 2018 and 2019 downward, the ERD team felt that this will potentially lead to dampening of global crude oil prices, thereby limiting the impact on India’s external metrics. “In hindsight, thus, RBI’s decision to hold the rates (at 6.50 per cent in the October 5th bi-monthly monetary policy review) seems correct. But only time can tell whether the exchange rate left to fend for itself in the market will be able to withstand any renewed onslaught,” said the report.

Referring to the index of industrial production (IIP) growth slowing to a three-month low of 4.3 per cent in August 2018, the report observed that the slowdown in IIP is now broad based. “The growth slid further downwards in primary goods. Consumer durables have also fallen drastically as the volatility in the financial market has translated into weaker discretionary demand. The pick-up in intermediate goods, albeit slow, is only because of base effect,” it said.

Looking ahead, despite negative base level in September 2017, the ERD expects to remain at the same level next month.

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