The baseline inflation trajectory for the next four quarters will be shaped by several factors. First, the uptick in food inflation may be sustained by price pressures in vegetables and pulses as more recent data suggest. Uneven spatial and temporal distribution of monsoon could exert some upward pressure on food items, though this risk is likely to be mitigated by the recent catch up in rainfall.
Second, despite excess supply conditions, crude oil prices may likely remain volatile due to geopolitical tensions in the Middle-East.
Third, the outlook for CPI inflation excluding food and fuel remains soft. Manufacturing firms participating in the industrial outlook survey expect output prices to ease in Q2.
Fourth, one year ahead inflation expectations of households polled by the Reserve Bank have moderated.
Taking into consideration these factors and the impact of recent policy rate cuts, the path of CPI inflation is projected at 3.1% for Q2:2019-20 and 3.5-3.7% for H2:2019-20, with risks evenly balanced. CPI inflation for Q1:2020-21 is projected at 3.6%.