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RBI likely to remain in neutral mode in 2017, CPI to accelerate to 5.4 percent in FY2018 - ANZ

The meteorological department of India has released its outlook for the nation’s monsoon. The IMD predicts a second consecutive year of normal monsoons. The department predicts that the rainfall might be 96 percent of the long-term average in 2017, which is a normal level.

With the caution that projections do not materialise always, the forecast is positive from the standpoint of inflation and growth, noted ANZ in a research report. Two straight normal monsoon years might help rural consumption, which has been greatly affected by the Indian government’s note ban reform. Furthermore, a normal monsoon forestalls the need for an aggressive price incentive policy to aid agriculture production that should be positive for inflation.

Following a slightly hawkish tone during this month’s policy meeting, the Reserve Bank of India is expected to be relieved after the release of the monsoon forecast. During its meeting in April, the RBI expressed concerns regarding an El Nino induced by dry season. However, the central bank’s monetary policy committee is expected to stay strongly in neutral mode this year, according to ANZ. The nation’s core inflation has been hovering between 4.8 percent and 5 percent since September 2016, along with the central bank’s commitment to its 4 percent inflation target for March 2018.

“We estimate CPI inflation to rise to 5.4% in FY2018 from 4.6% 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)”, added ANZ.

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