RBI likely to remain firmly in a neutral mode through 2017 due to sticky core inflation, says ANZ Research

The Reserve Bank of India (RBI) is expected to remain firmly in a neutral mode throughout 2017, owing to sticky core inflation and its focus on meeting its 4 percent CPI inflation target for March 2018.

In its April policy meeting, the central bank has expressed concerns about an El Nino-induced dry season. Core inflation has been sticky (hovering between 4.8-5 percent since September 2016) as well as the RBI’s commitment to its 4 percent inflation target for March 2018.

"In fact we estimate CPI inflation to rise to 5.4 percent in FY2018, from 4.6 percent in FY2017 owing to higher house rent allowances under the latest round of civil servant salary increases and the planned implementation of the goods and services tax (GST)," ANZ Research commented in its latest report.

Further, the India Meteorological department (IMD) released its monsoon outlook, predicting a second straight year of normal monsoons. It forecast that rainfall this year would be 96 percent of the long-term average, a level considered being normal.

A normal monsoon further obviates the need for an aggressive price incentive policy to support agriculture production, which should be positive for inflation. Meanwhile, two consecutive normal monsoon years should support rural consumption which has been severely impacted by the government’s note ban reform.