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Essence of the Week
May 15, 2017 | Source: AxisDirect
Good news came from the sky, when an official from the weather bureau highlighted (out of turn) that conditions had improved drastically in April, therefore bettering chances of normal monsoons this year. The next scheduled official update is in early June. Before that, we will perhaps hear from private weather forecaster, Skymet. So for now, the outlook on rural consumption and food supply is positive.
CPI inflation in April fell more than expected to 3% and would remain near these levels for few more months before ascending towards RBI’s year-end forecast of 5%. However, RBIs stated inflation risks from a quarter ago, like external volatility, oil prices, remonetization, higher general govt. deficit (see report inside), global reflation pulling up commodity prices, geopolitics and monsoons have all receded into the background.
Of the remaining risks, GST is expected to be more or less inflation neutral since effective tax rates for most goods & services will be broadly unchanged. The only remaining factor is the impact from HRA allowances under pay commission. Even here, officials from the ministry of finance are contesting the RBI’s estimate of 100- 150bps impact over 12-18 months.
Having said this, we do not think the RBI will react to inflation remaining under its 4% target. Expect the central bank to remain on an extended pause. In our view, the reaction function would shift to growth risks.
Watch out for: News on GST rates around 18 & 19 May. Mar Qtr GDP (31 May). Further news on monsoons.
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RBI
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Essence of the Week
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