Mumbai - The sharp decline in the headline inflation print to 3.31 per cent for October — a year-on-year-low — will result in a prolonged pause in the rates, but raises a “big question mark” on the Reserve Bank’s inflation forecasting, said a report recently.
“We now believe a prolonged pause by the Reserve Bank till the first quarter of FY20. But most importantly, there has to be a serious rethink by the RBI on inflation forecasting,” SBI Research said in a report.
The latest inflation print indicates the “uncertainty” about the inflation forecasting done by the six-member Monetary Policy Committee, which sets the interest rates.
“Generating forecasts under (and often unstated) assumptions about exogenous variables such as oil prices, government spending, and global growth will throw up illusory or elusive results,” it said.
The report called upon the MPC to work with short-term forecasts for the next three-six months as macro-variables like oil prices are now almost difficult to predict.
It pointed out that the oil price crash in FY15 had resulted in inflation undershooting RBI projection by more than 3 percentage points in December 2014.
Retail inflation fell to a one-year low of 3.31 per cent in October on the back of cheaper kitchen staples, fruits and protein-rich items, official data released on November 12 showed.
The inflation based on the consumer price index was 3.7 per cent in September 2018 and 3.58 per cent in October 2017.
The retail inflation number is the lowest since September 2017 when it touched 3.28 per cent.
The SBI report said the RBI, which has been mandated to keep the inflation at 4 per cent with a 2 percentage points change either way, had pegged inflation to come at 4.4 per cent by December.
It also said the slower headline inflation also suggested that there is little food procurement happening on the ground and called it as a matter of serious concern.
If oil prices continue to slide, headline inflation can also come below 3 per cent in the next two months, it added.