Inflation expectations see sharpest decline in 6 years

Amid the plunge in crude oil prices.

Reserve Bank of India (RBI) Governor Raghuram Rajan flagged last week that inflation expectations eased sharply in the Dec14 quarter. True to the word, expectations for the quarter and year ahead had tumbled from 12.7% and 13.5%in Sep14 to 8.8% and 9.3% in Dec14. Not only was the decline in absolute terms notable, but also the scale of change between quarters.

According to a report by DBS, the scale of correction in expectations in Dec14 was the sharpest since Dec08.Interestingly, these two periods are bound by another similarity – sharp decline in oil prices. Brent prices in INR terms were down 24% QoQ in Dec14, the most since the 46% QoQ decline in Dec08.

Here’s more from DBS:

Firstly, global factors, rather than purely domestic, have played a part in easing inflationary expectations. Tighter monetary policy bias, easing food prices and early steps to ease supply-side constraints certainly put a lid on expectations, but the global disinflationary outlook on the back of low crude prices seems to have been an equally key reason for the sharp fall late last year.

Secondly, the durability of the softer commodity run is still in doubt. This implies that any swift reversal in crude prices might play havoc with expectations, more so as petrol and diesel prices are now market-determined.