Inflation Outlook Remains Highly Uncertain

The Monetary Poolicy Committee that met recently has assessed that the inflation outlook is highly uncertain.

"The supply shock to food prices in April may show persistence over the next few months, depending upon the state of lockdown and the time taken to restore supply chains after relaxation. Among the pressure points, the elevated level of pulses inflation is worrisome, and warrants timely and swift supply management interventions, including a reappraisal of import duties. Immediate step-up of open market sales/PDS-offtake by the FCI to offload some part of excess stocks can cool down cereal prices and also create room for rabi procurement," the RBI Governor's statement read, while announcing the recent Monetary policy.

Given the current global demand-supply balance, international crude oil prices, metals and industrial raw material prices are likely to remain soft, it noted.

"This would ease input costs for domestic firms. Deficient demand may hold down pressures on core inflation, although persisting supply dislocations impart uncertainty to the near term outlook. Much will depend on the shape of the recovery after COVID.

Accordingly, the Monetary Policy Committee is of the view that headline inflation may remain firm in the first half of 2020-21, but should ease in the second half, aided also by favourable base effects. By Q3 and Q4 of FY20-21, it is expected to fall below target. Thus, the MPC's forward guidance on inflation is directional rather than in terms of levels. Going forward, as and when more data are available, it should be possible to estimate the path of inflation with greater certainty," the statement read.