The RBI shocked, nay pleasantly surprised, the bond and stock markets on Thursday. It drastically cut its inflation forecast for the first half of the current year by half a percentage point to 4.7-5.1 percent from 5.1-5.6 percent in February. It further cut the inflation forecast for the second half of the year (Oct-March) to 4.4 percent from its earlier forecast of 4.5-4.6 percent.
Given that the RBI’s, or rather the MPC’s, mandate is to keep inflation close to 4 percent, this forecast effectively means there is no rate hike in the offing for at least one year. Indeed, given that the RBI’s Monetary Policy Report (a document that it puts out twice a year, given its inflation-targeting mandate) forecasts FY20 inflation at 4.5 percent, chances are that there will no rate hikes for the next two years.
The RBI did not say why it cut the inflation forecast so drastically. Perhaps it was because inflation in the quarter that just ended, was mostly around 4.5 percent, a good half a percentage point lower than the 5.1 percent that RBI forecast. Much of this is because of the unexpected crash in food prices, and by the looks of it, RBI has merely factored it into the April-September forecasts.
