India may have already become a 4 per cent inflation economy, Pranjul Bhandari, Chief India Economist, HSBC Global Research, said in a report on Thursday. First, the long-term differential between global inflation and India inflation has been around 2 percentage points with the 5 percentage points differential seen in 2008-13 being more of an aberration. Second, inflation expectations have fallen into a virtuous cycle, so every fall in inflation leads to expectations of a further fall — a reverse of how it was between 2008 and 2013. Third, a confluence of one-off factors (a bumper crop, demonetisation and GST implementation) and durable measures (food distribution reforms) have pushed food inflation into negative territory. After taking into account all these factors, food inflation and core inflation (excluding food and fuel) are expected to be at 4 per cent and therefore, headline inflation is also likely to be around 4 per cent, Pranjul said.

Will it mean rate cuts?



Pranjul said in the report that if the RBI was a pure inflation targeter, it would mean no rate cuts (or hikes) since the target is perfectly met.

If it was a real rates targeter and wanted to lower real rates to, say, 1.5 per cent (where it was for much of the last two years), it could cut rates by about 75 basis points. But, she added, in reality, the RBI is not a real rates targeter and has recently mentioned that its tolerance for slightly higher real rates is justified during periods of financial impairment. As such HSBC expects the RBI to cut the policy repo rate by 25 bps on August 2 to bring it down to 6 per cent. “We see a risk of another 25 bps rate cut if inflation remains well below 4 per cent in the second half of FY18,” the report added.