RBI aims to keep retail inflation near 4% on 'durable basis'

"The MPC observed that while inflation has fallen to a historic low, a conclusive segregation of transitory and structural factors driving the disinflation is still elusive.

"The MPC remains focused on its commitment to keeping headline inflation close to 4 per cent on a durable basis," the central bank said in its 3rd bi-monthly monetary policy statement, 2017-18.

The RBI's Monetary Policy Committee (MPC) today decided to reduce the repo rate -- at which it lends to banks -- by 0.25 per cent to 6 per cent.

Going forward, as base effects fade, the inflation momentum is to be hinged upon the impact of house rent allowance (HRA) under the Central Pay Commission (7th CPC), price revisions withheld ahead of the Goods and Services (GST) rollout as well as disentangling of structural and transitory factors shaping food inflation, the apex bank said.

The regulator has set a medium-term target for consumer price index (CPI) based retail inflation at 4 per cent with a +/- bias of 2 per cent.

RBI Governor Urjit Patel said inflation trajectory now incorporates the first-round impact of the implementation of the HRA awards of the 7th CPC by the central government.

"Excluding the HRA impact which will affect the CPI cumulatively, inflation would be a little over 4 per cent by fourth quarter as against 4.5 per cent inclusive of the HRA in the June statement (of RBI policy)," Patel said.

India's CPI-based retail inflation stood at 1.54 per cent in June this year to hit its lowest reading in the series based to 2011-12.

The MPC also noted that inflation is well below target in most of advanced and emerging market economies despite a modest rise in global demand as well as uptick in crude oil.

Citing its survey on inflation, the RBI said households seem to have discounted the recent low inflation prints; their three months and one year ahead inflationary expectations polled in the RBI survey in June have "somewhat hardened".