Demonetisation positive? Inflation could fall further, RBI says

The withdrawal of SBNs could result in a possible temporary reduction in inflation of the order of 10-15 basis points in Q3. Photo of Prime Minister Narendra Modi at a press conference. Image Source: IANS

Inflation may come down marginally due to the withdrawal of higher denominations in November.

“The withdrawal of SBNs could result in a possible temporary reduction in inflation of the order of 10-15 basis points in Q3,” RBI said as it released its bi-monthly monetary policy on Wednesday.

However, if the usual winter moderation in food prices does not materialise due to the disruptions, RBI warned that food inflation could re-emerge in winter.

“Taking these factors into account, headline inflation is projected at 5% in Q4 of 2016-17 with risks tilted to the upside but lower than in the October policy review,” RBI said.

Discretionary spending on seasonal goods and services may have been impacted on account of demonetisation. RBI reiterated that the prices of these items may survive these transitory effects as they are subject to seasonal demand.

“Prices of housing, fuel and light, health, transport and communication, pan, tobacco and intoxicants, and education – together accounting for 38 per cent of the CPI basket – may remain largely unaffected,” RBI added.

Further RBI said, “Despite some supply disruptions, the abrupt compression of demand in November due to the withdrawal of SBNs could push down the prices of perishables in the reading that becomes available in December. On the other hand, prices of wheat, gram and sugar have been firming up.”

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