India's retail inflation forecast raised due to rise in vegetable prices

The Reserve Bank Thursday raised the retail inflation forecast marginally to 3-3.1 per cent for the first half of the current fiscal, tracking uptick in food prices - mainly vegetables, albeit expectations of a normal monsoon this year. In its first bi-monthly policy for FY20 in April, the Reserve Bank of India (RBI) had forecast the retail inflation to be hovering in the range of 2.9-3 per cent for six months till September.

However, the retail inflation projection for the second half of this fiscal has been cut to 3.4-3.7 per cent as against RBI's previous projection of 3.5-3.8 per cent. Cutting benchmark lending rates for the third consecutive time, the apex bank slashed the repo rate - the short-term lending rate at which bank borrows from the RBI - by 0.25 per cent to 5.75 per cent in its second bi-monthly policy review of FY20.

"The baseline inflation trajectory for 2019-20 is shaped by several factors. First, the summer pick-up in vegetable prices has been sharper than expected, though this may be accompanied by a correspondingly larger reversal during autumn and winter," RBI said in its second bi-monthly monetary policy statement.

Besides, the more recent information suggests a broad-based pick-up in prices in several food items. This has imparted an upward bias to the near-term trajectory of food inflation, RBI said, adding that crude prices have continued to be volatile.

"Taking into consideration these factors, the impact of recent policy rate cuts and expectations of a normal monsoon in 2019, the path of CPI inflation is revised to 3.0-3.1 per cent for H1:2019-20 and to 3.4-3.7 per cent for H2:2019-20, with risks broadly balanced," RBI said.

Risks around the baseline inflation trajectory emanate from uncertainties relating to the monsoon, unseasonal spikes in vegetable prices, international fuel prices and their pass-through to domestic prices, geopolitical tensions, financial market volatility and the fiscal scenario, it added.

Even as a significant weakening of domestic and external demand conditions appear to have led to a sharp broad-based decline of 60 basis points in inflation excluding food and fuel in April; this has imparted a downward bias to the inflation trajectory for the rest of the year, read the RBI policy statement.

(With inputs from agencies.)