SBI Research in its latest report has showed that the sharp decline in the headline inflation print to 3.31 percent for October--a year-year-low-- will result in a prolonged pause in the rates, however raises a ‘big question mark’ on the Reserve Bank's inflation forecasting. It underlined “We now believe a prolonged pause by the Reserve Bank till the first quarter of FY20. But most importantly, there has to be a serious rethink by the RBI on inflation forecasting”.
The report further pointed out that the latest inflation print indicates the ‘uncertainty’ about the inflation forecasting done by the six-member Monetary Policy Committee, which sets the interest rates. The report called upon the MPC to work with short-term forecasts for the next three-six months as macro-variables like oil prices are now almost difficult to predict. It pointed out that the oil price crash in FY15 had resulted in inflation undershooting RBI projection by more than 3 percentage points in December 2014.
Besides, the report said that the RBI, which has been mandated to keep the inflation at 4 percent with a 2 percentage points change either way, had pegged inflation to come at 4.4 percent by December. Moreover, it stated that the slower headline inflation also suggests that there is little food procurement happening on the ground and called it as a matter of serious concern, and adding that if oil prices continue to slide, headline inflation can also come below 3 percent in the next two months.
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