As 2017 came to an end, we are faced with the question, what is the inflation outlook for the coming year? We can expect inflation to hover well within RBI’s target range of 4.3 per cent to 4.7 per cent, probably more towards the upper-end. The target revision was prudent on the back of multiple factors.
Considering the recent OPEC announcement on maintaining production-cuts through the next year may cause the recent rise in crude prices to sustain, unless in an event of a negative supply shock owing to geopolitical uncertainties across production regions; that’s when we can expect an upswing.
Though vegetable prices have been on the up side recently, winter arrivals can bring along some easing. This, along with softening prices of pulses and the shift of various goods and services into lower GST brackets culminate to strengthen the case for a controlled retail inflation.
Notably, the gradual implementation of HRA for government employees can give an impetus to housing inflation, albeit benign.
What can we expect from the RBI on the policy front? Though RBI had a confident undertone while commenting on growth prospects, the risks to growth also loom large. Having said that, the central bank’s stance can be well described as ‘neutral’ and ‘data dependant’ as they wait for some more data to unfurl before reacting. With the larger probability of inflation being on the brink of overshooting the target, we expect that we are at the end of the monetary easing cycle.
Though the GST rollout has been disruptive for many businesses and had a minor impact on consumption, GST can be expected to be inflation-neutral for all practical purposes. With almost half of the CPI basket remaining unscathed by GST, the impact on other commodities are offset internally. The above graph suggests a marginal hike of 10 bps.
(The writer is co-founder of Fisdom.com)