Rise in inflation likely to prevent RBI from cutting rates further

According to data released today, inflation in May gained further after a rise last month. In last monetary policy, Reserve Bank of India (RBI) noted an uptick in inflation in March and April, which according to the central bank made it harder to predict.

Inflation for May, came at 5.76 percent, beating the median estimate of 5.6 percent. April reading was revised higher to 5.47 percent from previous 5.39 percent.

Reserve Bank of India (RBI) governor Raghuram Rajan, made inflation targeting key cornerstone of monetary policies in India, which suffered decades of rampant inflation. RBI had set a goal to bring down inflation to 6 percent by the beginning of 2016. Next target for RBI is to bring down inflation, as measured by consumer price index to 5 percent by January 2017. Eventually, the target is to maintain retail inflation at 4 percent, within a band of +/- 2 percent.

With all due respect to prudence monetary policies of Reserve Bank of India (RBI), the main factor that brought inflation down was oil price, which dropped more than 60% by end 2015, from 2014 peak. India is a large net importer of crude oil and that fact is unlikely to change in near future. As a matter of fact, India is the largest incremental buyer of crude oil this year.

With inflation still a bit further away from RBI’s central target and uncertainties surrounding global commodity prices, the Reserve Bank is more likely to use caution before reducing rates from current 6.5 percent.