Reserve bank lowers inflation projection for January to 5.8%

The Reserve Bank on Tuesday lowered its inflation projection to 5.8 per cent for January 2016 and said it will aim to bring it down further to 5 per cent by the end of next financial year. RBI had earlier projected inflation at 6 <g data-gr-id="22">per cent</g> by January. In its fourth bi-monthly monetary policy review in the current fiscal where it effected a higher-than-expected cut of 0.5 per cent in repo rate to 6.75 per cent, RBI said that "inflation is expected to reach 5.8 <g data-gr-id="23">per cent</g> in January 2016, a shade lower than the August projection".

Inflation has been trending lower for quite some time with the Consumer Price Index (CPI) based retail inflation falling to a record low of 3.66 <g data-gr-id="24">per cent</g> in August. The Wholesale Price Index (WPI) based inflation remained in the negative zone at (-)4.95 per cent on cheaper food items and overall fall in commodity prices.

RBI Governor Raghuram Rajan said inflation is likely to go up from September for a few months as favourable base effects would reverse. A bulk of RBI's conditions for further accommodation for a rate cut have been met, so the target of 6 per cent inflation is likely to be achieved, he said. "Since our last review (on August 4), the bulk of our conditions for further accommodation have been met. Therefore, the focus should now shift to bringing inflation to around 5 <g data-gr-id="29">per cent</g> by the end of fiscal 2016-17," said the Bi-monthly Policy Statement for 2015-16. Further, RBI said <g data-gr-id="33">outlook</g> for food inflation could improve if <g data-gr-id="34">increase</g> in sown area translates into higher production.

Also, <g data-gr-id="31">moderate</g> rise in minimum support prices of cereals, downward pressure on sugar and edible oil and benign crude oil prices will keep a downward pressure on prices. But RBI cautioned that the pass-through of the recent depreciation of the rupee will have to be carefully monitored.

The central bank also said that weakening of global activity suggest that commodity prices will remain contained for a while. The still-low industrial capacity utilisation indicates <g data-gr-id="27">more domestic</g> demand is needed to substitute for weakening global demand in order that the domestic investment cycle picks up, it said.