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Retail inflation to be around 6% in 12 months

December 30, 2014 09:53 IST

Economic activity may remain muted in Q3; sees gradual pick up next financial year

A salesman waits for customers at a grocery wholesale market in Chandigarh.

Image: A salesman waits for customers at a grocery wholesale market in Chandigarh. Photograph: Ajay Verma/Reuters

Retail inflation would be around six per cent in the next 12 months, ‘if the international crude oil prices remain around the current levels and the monsoon next year turns out to be normal’, Reserve Bank of India said in its Financial Stability Report released on Monday.

At the same time RBI believe domestic activity which weakened in second quarter of 2014-15  is likely to be muted in third quarter also because of a moderate kharif harvest. RBI's current central estimate for gross domestic product for 2014-15 is placed at 5.5 per cent with a gradual pickup in momentum through 2015-16.

Retail inflation rose 4.38 per cent year-on-year in November, the slowest pace in data going back to January 2012.

“The substantial easing in CPI inflation to 4.4 per cent in November 2014 from 11.2 per cent a year earlier marks a significant improvement in the Indian macroeconomic environment,” RBI said.

A Kashmiri shop owner in Srinagar

Image: A Kashmiri shop owner in Srinagar. Photograph: Danish Ismail/Reuters

In its fifth bi-monthly monetary policy review held earlier this month, RBI Governor Raghuram Rajan had said a change in the monetary policy stance was likely early next year, if improvements in inflation and fiscal health continued.

The repo rate stands at eight per cent since the last increase of 25 basis points in January.

Economic growth has remained weak and this was evident from the fact that domestic activity weakened in the second quarter of 2014-15, with growth at 5.3 per cent. “Activity is likely to be muted in the third quarter also because of a moderate kharif harvest.

“Choppiness in the Index of Industrial Production growth during 2014-15, so far, has raised questions over consolidation of industrial growth.

A vegetable seller

Image: A vegetable seller. Photograph: Reuters

“With capacity utilisation during the first quarter 2014-15 being the lowest in the past four years, significant new investments may take time to materialise.

“In addition, measures of new investment intentions currently show only a modest pick-up in investments,” the report noted.

“RBI’s current estimate for gross domestic product growth for FY15 is at 5.5 per cent, with a gradual pick-up in momentum through FY16.

Even the global environment remains weak.

The Reserve Bank of India

Image: The Reserve Bank of India. photograph: Reuters

“The current weak global outlook may prolong easy monetary policy stance in most advanced economies.

“Consequently, low-risk premia might lead to accumulation of vulnerabilities and sudden and sharp overshooting in markets cannot be ruled out,” said the report.

In 2014, foreign portfolio investments were robust.

However, RBI warned that their heightened interest in debt may create volatility in domestic debt markets, despite some evidence that FPIs were taking a longer-term view on the Indian debt paper.

“Given the primacy of US-based FPIs in India, unexpected changes in the US monetary policy could have adverse effects on FPI flows through direct and indirect channels,” said RBI in the report.

Tax revenues as a percentage of Budget estimates were lower in April-October compared to the year-ago period, reflecting lower collections under all major taxes.

Non-tax revenue as a percentage of Budget estimate was also lower.

“The lower revenue mobilisation, which is partly emanating from still subdued economic activity, is a major concern,” added the report.

BS Reporter in Mumbai
Source: source image