1. Urjit Patel cuts repo rate 25 bps: Expect inflation to trend lower

Urjit Patel cuts repo rate 25 bps: Expect inflation to trend lower

In the first policy meeting of the monetary policy committee (MPC) chaired by new Reserve Bank of India (RBI) governor Urjit Patel, the repo rate was reduced by 25 basis points (bps) to 6.25%.

By: | Published: October 5, 2016 6:09 AM
RBI Policy, RBI Monetary Policy, RBI Policy Today, rbi policy announcement today, rbi policy announcement

Overall, the central bank has retained its March 2017 inflation target of 5% —with upside risks that have reduced compared with August.

In the first policy meeting of the monetary policy committee (MPC) chaired by new Reserve Bank of India (RBI) governor Urjit Patel, the repo rate was reduced by 25 basis points (bps) to 6.25%.

The MPC highlighted that the recent drop in inflation reflects a downward shift in food inflation momentum and opens up space for policy action. That said, it emphasised that the implementation of the 7th Pay Commission recommendations, especially the increase in house rent allowance, and the increase in minimum wages due to possible spillovers through minimum support prices, could pose a challenge going ahead. Overall, the central bank has retained its March 2017 inflation target of 5% —with upside risks that have reduced compared with August.

Going ahead, we expect inflation to trend lower and average 4.8% in the second half of FY17, because of the good monsoon and supported by steps taken by the government to manage food supply. In our view, the good monsoon will also push up rural incomes and boost private consumption by  90 bps this fiscal, supporting GDP growth. Overall, we expect inflation to average 5% and GDP to grow at 7.9% in fiscal 2017.

For fiscal 2017, we expect CPI to stay soft at 5% on average — or 10 basis points (bps) higher than in fiscal 2016 — given that monsoon has been normal with a favourable temporal and spatial distribution. Good rains will soften food inflation and offset the upside risk to overall inflation from sticky services inflation. That said, risks to overall inflation going ahead could emanate from narrowing output gap pushing up core inflation; and, the 7th Pay Commission and One Rank One Pension payouts. Further, we expect oil prices to remain contained at $40-45 per barrel in 2016. That will help keep inflation, fiscal deficit and current account deficit under control.

The author is chief  economist at CRISIL

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