The Reserve Bank of India, in its policy guidance, takes in inflationary expectations along with headline/core inflation. Inflationary expectations continued to increase during the central bank’s survey in December 2015. Decline in oil prices resulted in inflation expectations to alleviate in absolute terms at the end of 2014 and start of 2015.
Simultaneous increase in food price inflation that was mainly due to pulses was also an effect during that period. Forecasts for the three-month and one-year since then have been rising, reversing almost half the correction observed in 2015.
The central bank has highlighted earlier that scale of change between readings is more important for policy guidance than the absolute values. The scale of q/q rise lowered towards the end of 2015 even if inflationary expectations rose slightly until December 2015. This is expected to have been due to the renewed decline in global commodity prices that continued through early 2016, according to DBS Bank. The bank added that the RBI will get some comfort from this.
Food prices stabilization is expected to counter the effect of oil prices bottoming out in the three months to March 2016, maintaining stable expectations, says DBS. Also, the forthcoming adjustment in pensions/salaries of public sector is likely to put a floor under expectations. According to DBS Bank, this implies that the RBI is expected to go with a measure reduction of rate next week and keep an accommodative stance.
