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Inflation strikes back

RBI is committed to keeping the CPI inflation rate within a range of 4 per cent plus or minus 2 per cent

Inflation strikes back

MPC moves may not really be catching bond markets by surprise anymore. But in the tricky game of second guessing the repo rate, it is important to know what factors the MPC is watching to make its bi-monthly decisions. Earlier the RBI used to try and juggle inflation, economic growth and exchange rates. But after the new monetary policy agreement was inked between the RBI and the central government in 2016, the RBI is committed to keeping the CPI inflation rate within a range of 4 per cent plus or minus 2 per cent. This has made the monthly CPI inflation reading the most critical input to MPC's rate moves in the last two years.

After falling obligingly from over 10 per cent in November 2013 all the way to 1.5 per cent by June 2017, the CPI inflation rate has since spiralled rapidly up to 5.07 per cent in January 2018. Apart from the seasonal flare-up in food prices, factors such as rising global oil prices and the Seventh Pay Commission payouts on HRA are believed to have fuelled this. In its recent February meeting, the MPC set a CPI inflation target of 5.1 to 5.6 per cent for the first half of FY19 and 4.5 to 4.6 per cent for the second half. So, the closer the monthly CPI reading gets to that 5.6 per cent figure, the higher the chance that MPC will hike rates in the coming months.

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