Mint Quick Edit | Low inflation: Stoking high hopes?
India’s retail inflation rate under 3% puts it close to the lower limit of RBI’s target. We haven’t seen such splendid price stability for over six years. But how the rest of this year will pan out remains a question.
Just days after the Reserve Bank of India (RBI) surprised us with the scale of its monetary stimulus, the country’s inflation has slumped to a low last seen more than six years ago.
Also Read: Mint Quick Edit | An inflation dip enlarges RBI’s policy space
The consumer price index rose only 2.82% from a year earlier in May. In April, it had risen 3.16%. Inflation has now been under RBI’s 4% central goal for four months in a row, thanks mostly to a cool-off in food prices. RBI is likely to view it as a validation of its bigger-than-expected 50-basis-point rate cut last week, with a full percentage-point cut to follow later this year in the cash banks must keep with it as a ratio of deposits.
Also Read: Has RBI unleashed its arsenal too soon for the economy?
How inflation behaves for the rest of the year is now the big question. The central bank has shifted its policy stance to ‘neutral’ from ‘accommodative’, which means any nasty surprise on price stability could make it tighten monetary conditions.
Also Read: The Reserve Bank’s leap of faith: A big rate cut is very hard to justify
The hope is that price pressures will stay subdued, which would be a major milestone for the idea of inflation targeting. Such an outcome is not inevitable, though. If the scatter and intensity of monsoon rainfall could let India down, so might the fallout of today’s global trade flux. For now, though, policymakers can breathe easy.
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