What the RBI’s monetary policy report says about inflation drivers, in charts

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Mint delves into the specifics of the monetary policy report in five charts: Despite the recent rise in crude oil prices, the central bank retained its baseline assumption of $85 a barrel for the Indian basket for the second half of the fiscal year. While Brent crude prices had risen to as much as $98 a barrel in September, they fell below $90 on Friday. However, oil prices are known to be volatile and if they settle above $90 for longer, the RBI's inflation projections could prove to be an underestimate.

The southwest monsoon season was an important base assumption that changed in the latest monetary policy report. The Indian economy is heavily reliant on this season, which provides 75% of the country's rainfall. According to the monetary policy report, rainfall was uneven from June to September, with August recording a 36% deficit.

While it recovered in September, it ended the season 6% below the long-term average (which is classified as ‘below normal’), causing reservoir levels to fall. In the April report, the RBI had assumed a normal monsoon this year for its projections. The RBI report showed how core inflation would have behaved if certain other volatile items were removed.

Core inflation excluding food and fuel was 4.9% in October. If petrol and diesel are also removed, it would be 5.1%, suggesting they were a downward force on headline inflation. Also excluding gold and silver, it would have come down to 4.8%, which means these two precious commodities had exerted upward pressure.