India's core inflation rate is easing, but RBI may not yet lower its guard - Pragnya IAS Academy - News Analysis.

India's core inflation rate is easing, but RBI may not yet lower its guard.

• A relatively stubborn core inflation has stopped RBI from giving full support to growth impulses.
• That RBI has lowered its retail inflation forecast shows it expects core inflation to remain stable.
The Reserve Bank of India (RBI) is clearly in an accommodative phase with two consecutive policy rate cuts. What stops the central bank, though, from giving full support to growth impulses through a change in its stance is core inflation.
Core inflation renders the sharp drop in headline retail inflation less appealing. While headline retail inflation has dropped 1.85 percentage points in the last one year, core inflation has remained stable.

In its latest monetary policy report, the central bank offers an explanation for the stubbornness of core inflation. Using statistical analysis, it noted that the impact of a positive shock to the output gap has a stronger and faster push to core inflation than the headline figure.
In other words, as economic activity picks up, the pressure on core inflation is more than overall inflation, and quicker too.
The accompanying chart from the report shows how both core and headline inflation respond to a 100-basis-point shock to the output gap. What the chart also shows is that the effect also wanes faster on core inflation than on headline inflation. This, perhaps, explains the deceleration in core inflation in the last six-eight months.
Shubhada Rao, chief economist at Yes Bank Ltd, notes that core inflation has eased sharply in the last six-eight months. “Given the momentum and the evidence of the last few months, it would seem that core inflation is trending towards the headline inflation and not the other way around," she said.
The outlook for corporate earnings suggests that pricing power has yet to come back in a strong way in both manufacturing and services. The central bank’s study says that core inflation would surge if pricing power increases more than proportionally with the strengthening of economic activity. “The results suggest the need for monetary policy to be vigilant in times of large positive output gaps," said the RBI monetary policy report.
Therefore, RBI may be reluctant to drop its vigilance over core inflation, but it has lowered its headline inflation forecast again this time. This suggests that the central bank expects core inflation to remain stable.
Moreover, the output gap is a tricky concept. It is the difference between the actual output of an economy and the potential output it could have generated at full capacity. The Indian economy’s potential growth rate has been contested for long, and the central bank has not indicated a clear position on this. (Source:Livemint)


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India's core inflation rate is easing, but RBI may not yet lower its guard.

RBI’s monetary policy committee cautious on inflation - Pragnya IAS Academy - News Analysis.

RBI’s monetary policy committee cautious on inflation.

The six-member committee unanimously decided to leave rates unchanged at the meeting two weeks ago, while staying optimistic on growth.

India’s monetary policy committee sounded cautious on inflation and preferred to wait for more data to see for how long price pressure and growth momentum would remain soft, according to minutes of its December 5 meeting published on Wednesday.The six-member committee unanimously decided to leave rates unchanged at the meeting two weeks ago, while staying optimistic on growth.
While the Reserve Bank of India (RBI) under the former governor, Urjit Patel, sounded hawkish at the meeting, the panel, under the new chief, Shaktikanta Das, might be more focussed on boosting growth and cutting rates after a recent sharp decline in inflation.
Shaktikanta Das took charge at the RBI last week, two days after Urjit Patel’s resignation.
“While the recent downward surprises to inflation have significantly reduced the extent of policy tightening required in future, they have not eliminated the requirement altogether,” said RBI Deputy Governor Viral Acharya in the minutes.
While noting the recent easing of inflation and growth momentum, the panel members preferred to wait for some more data to determine the interest rate outlook, citing uncertainties over the medium-term outlook on food inflation and oil prices.
However, under Shaktikanta Das, who is in favour of supporting growth, the rhetoric is likely to change given that inflation has eased further this month.
India’s November headline inflation fell to its lowest in 17 months, to 2.33%, well below the RBI’s medium-term target of 4%.
Economists expect inflation to stay muted for the next few months as global crude prices are likely to stay soft and India’s food prices might remain low.
The RBI revised its inflation projections downwards to 2.7-3.2% by March, from 3.9-4.5% two months back, and expects it to stay within 4.2% by September 2019.
One committee member, R Dholakia, known for his dovish attitude, called for a change in stance to “neutral” from “calibrated tightening” as the downside risks to inflation “cannot be overlooked”.
“We should not deny any possibility of either a rate cut or a rate hike in the near future depending on data coming in,” Dholakia said.
India’s growth in July-September slowed to 7.1% from 8.2% in the previous quarter and could soften further as private investment remained low.
A slowdown in global growth with concern over a potential recession in the United States could add to expectations of a rate cut.
Traders will closely monitor a US Federal Reserve statement due later on Wednesday for indications of expectations about rate increases there. (Source:Livemint)


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RBI’s monetary policy committee cautious on inflation.

How does inflation dent your financial planning? - Pragnya IAS Academy - News Analysis.

How does inflation dent your financial planning?.

Inflation hits your financial plan on multiple counts. It impacts your future cost of living.

Inflation is quite often called the thief of purchasing power. Why is that so? That is because inflation measures the rate of price rise per annum. If the price of food, fuel, clothing and housing are growing very fast each year then it means that your income will be able to buy less of the same thing. Alternatively, your income will have to grow faster than inflation so that at least your standard living can be maintained. But how does inflation impact your financial planning?
Financial planning entails laying out your long-term financial goals and then creating a plan to move towards these goals. Inflation hits your financial plan on multiple counts. It impacts your future cost of living; it has an effect on the real returns that you will earn on your investments and it will also have an impact on the way you plan for your future goals. Let us look at four such effects.
1. Effect on the value of your future goals
The way you go about financial planning is that you first lay out your dreams and then work backward to see how you need to invest for the same. However, when it comes to your retirement planning, you first need to project your monthly maintenance costs. The normal method of doing it is that you take your current costs and inflate the number into the future with appropriate assumptions. Then that number gets adjusted for a shift in standard of living.
2. Future inflows are going to be worth a lot less today
This is a contra approach to looking at financial planning. In the first point, we looked at the future value of today’s money. At this point, we are looking at the present value of future money. Let us say you are going to receive fixed corpus of funds in the future. Shifts in inflation will make a difference to how much these future inflows are worth today.
3. It eats away a part of your returns
In financial planning, the real returns matter a lot more than the nominal returns because that is what determines the purchasing power. For example, if a bank FD is giving returns of 8% when inflation is 5%, then your real return is 3%. However, if bank FDs are giving 9% returns with inflation at 7% then your real returns are just 2%. It is not just the nominal returns on your investment that matters. What also matters is how much of real returns you are earning. That gets impacted by the rate of inflation. That is how inflation tends to impact your returns on investment.
4. Review of your insurance requirements
Your life policy is normally your back-up to take care of your family in the event of any exigency. How is the life policy corpus determined? For example, if you expect that your family will need a monthly income of Rs.1 lakh to run the house, then you can take a policy of Rs.3 crore so that even if the corpus is invested in a safe money market fund giving 4% real returns, that can still cover the needs of your family. However, if inflation was to go up, then the insurance corpus will have to be higher.
What does all this add up to?
When inflation goes up, your eventual corpus requirement will go up. Then you have two choices. You can either reduce your goal amounts; which is quite difficult or you can increase your monthly SIP savings. When inflation goes up your future goals have to be met with higher savings or higher risk investments. It is a choice between the devil and the deep sea. (Source: The Business Standard)


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How does inflation dent your financial planning?.

RBI flags upside risks to inflation - Pragnya IAS Academy - News Analysis.

RBI flags upside risks to inflation.

Outlook raises possibility of another rate hike, say experts The Reserve Bank of India (RBI) on Wednesday reiterated concerns over rising inflationary pressures this fiscal year due to global and domestic pressures and called for continuous vigil to keep them at bay.

“Headline inflation, which averaged 4.8% during Q1 FY19, is likely to face upside risks over the rest of the year from a number of sources, warranting continuous vigil and a readiness to head off those pressures from getting generalized,” RBI said in its 2017-18 annual report.
It pointed out that rising global commodity prices, especially of crude oil, and recent global financial market developments are firming up input cost pressures.
It pointed out that rising global commodity prices, especially of crude oil, and recent global financial market developments are firming up input cost pressures.
Staggered impact of revisions in house rent allowance by various state governments could also pose an upside risk through second round effects, the central bank said. “Much will depend on how food prices play out and how effective are the supply management strategies,” it said.
The central bank projects headline inflation at 4.6% in Q2FY19; 4.8% in H2 and 5% in Q1 FY20, including the HRA impact for central government employees. But, excluding the impact of HRA revisions, headline inflation is forecast at 4.4% in Q2FY19; 4.7-4.8% in H2 and 5% in Q1 FY20.
Some experts believe RBI’s hawkish tone heightens the probability of another policy rate hike.
Gaurav Dua, head of research, Sharekhan by BNP Paribas said RBI appears sanguine about growth with pick-up in manufacturing and turnaround in capital formation along with strong agriculture output for the third consecutive year.
“Given the improving growth outlook and inflationary concerns, RBI is expected to toe the hawkish line and probability of another rate hike remains high,” said Dua.
Since the start of this year, RBI has raised the key repo rate by 50 basis points to 6.5% currently.
The global economy expanded at a strong pace in the first half of 2018. While activity was accompanied by tightening labour markets, firm commodity prices and resilient trade dynamics in advanced economies, the emerging markets front-ran the advanced economies in Q1 but trailed somewhat in Q2.
This, RBI said, was owing to the exit of capital flows on risk aversion generated by a “cocktail of trade wars, rising interest rates in the US, geo-political tensions and the unrelenting hardening of crude oil prices.
It added that headwinds could nonetheless rise from further tightening of financial conditions, escalation of trade tensions and intensification of geopolitical risks.
Other economists are of the opinion that since RBI is mandated to target the headline inflation as measured by the consumer price index (CPI), a rate hike is not expected.
“The central bank is mandated to maintain headline inflation at 4% (+/- 2%) in its inflation targeting regime. While the core inflation has been hardening and will likely average around 5.7-5.8% levels in FY19, the softer food inflation is expected to offset the pressures on headline CPI. As such we expect headline CPI to average closer to 4.5% in FY19,” said Shubhada Rao, chief economist at Yes Bank.
Rao explained that the impact on the economy of two back to back rate hikes in June and August will play out over two quarters. “However, in an environment of heightened global volatility, with hardening crude prices, sustained strength in the US dollar, trade wars among others, the central bank continues to remain data-dependent for reviewing the policy stance,” she added.
However, the central bank expects an acceleration of activity in the Indian economy. For instance, the initial lull in the progress of the south-west monsoon got reversed, cropping gaps are closing and agricultural production is likely to remain strong for the third consecutive year.
On the industrial front, there has been a sustained pick-up in manufacturing and mining activity, especially coal and corporates are reporting robust sales growth and improvement in profitability as pricing power returns.
“Keeping in view the evolving economic conditions, real GDP growth for 2018-19 is expected to increase to 7.4% from 6.7% in the previous year, with risks evenly balanced,” RBI said. (Source: Livemint)


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RBI flags upside risks to inflation.

IMF welcomes RBI decision to hike repo rate, terms it as appropriate step in times of rising inflation - Pragnya IAS Academy - News Analysis.

IMF welcomes RBI decision to hike repo rate, terms it as appropriate step in times of rising inflation.

The International Monetary Fund has welcomed the decision of the Reserve Bank of India to increase the repo rate by 25 basis point to 6(point)25 percent.

IMF Spokesman Gerry Rice told this to reporters during his bi-weekly news conference in Washington. He said that the IMF thinks that this was an appropriate step by the RBI in present context of rising inflation and additional upside risks to the forecasts due to higher oil prices, exchange rate depreciation and other domestic factors.
He was responding to a question on the decision of the RBI to increase the interest rate for the first time in the last four years.
It was in January 2014 that the RBI had increased the repo rate to eight percent to keep the inflation under check. (Source: News on air)


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IMF welcomes RBI decision to hike repo rate, terms it as appropriate step in times of rising inflation.

The pulse of India's agrarian economy

The severe drought across India should hopefully help focus attention on the overuse of water in agriculture.

A data analysis showed that the average water footprint for five major crops—rice, wheat, maize, sugarcane and cotton—is far higher than global averages.

Time to Change

• In 1960s. the dominant role was given to water-intensive cereals
• It is time India switched its policy focus to the efficiency of water use rather than adding to the food mountain.
• One key element of this switch should be greater incentives for the cultivation of pulses as well as millets because
• They use less water for every unit of output
• It also acts as a weapon in the fight against hidden hunger.

Why in news?

• Maharashtra government has taken a few baby steps to help farmers move away from crops that use water intensively.
• It will make it more attractive for farmers to grow pulses by offering to pay a guaranteed price that is 5-10% higher than the central minimum support prices (MSPs) for pulses, as well as provide free seeds and fertilizers to farmers who grow pulses.
• This is a welcome beginning in a state that is dominated by the sugar lobby, and an experiment that other state governments should keep a keen eye on.

We need to apply this on national level

• Rising prices of these pulses are not only a big contributor to high food inflation.
• We are importing pulses to feed growing demand in India.
• To minimize the wedge between domestic prices and zero-tariff import prices, the government should also consider doing away with export duties on pulses.
• This will prompt farmers to produce more for both the domestic and foreign markets.

Conclusion

The centre and states would also do well to simultaneously focus on insuring farmers, raising yields within water constraints, enhancing food processing and storage facilities and abandoning export controls. A shift in the highly skewed cropping pattern of the country is the need of the hour.