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The latest Monetary Policy Committee (MPC) meeting minutes by the Reserve Bank of India (RBI) were hawkish on aggregate. Most members were concerned about the trend reversal in food inflation due to seasonal factors and ongoing pace of re-monetization.
While some members underscored uncertainty with respect to the development of El Nino weather conditions, they will be encouraged by India's metrological department forecast of a near normal monsoon. The focus will now turn to the actual performance of the monsoon, which can deviate from the forecast on either side.
A mild deficit is not expected to be a cause for concern, as the government has sufficient food stocks which it can liquidate to contain food price volatility. The common theme of sticky core inflation turned out to be the key factor behind the MPC's hawkish stance. The rigidness in core inflation can, further, put a floor under the headline CPI and is a key headwind to the 4 percent inflation target for March 2018.
"Still, we don’t see a sharp upside to core inflation momentum in view of excess capacity. Given the more hawkish leaning of most MPC members and with inflation set to remain above the RBI's 4 percent inflation target in FY2018, we expect the central bank to remain on hold in FY2018," ANZ Research commented in its latest report.
