RBI governor Urjit Patel flagged concerns over persistently high inflation while acknowledging that growth impulses in the economy continue to be reasonably strong in the meeting of the monetary policy committee that raised the repo rate by 25 basis points (bps) to 6.5% earlier this month.
Reserve Bank of India governor Urjit Patel flagged concerns over persistently high inflation while acknowledging that growth impulses in the economy continue to be reasonably strong in the meeting of the monetary policy committee (MPC) that raised the repo rate by 25 basis points (bps) to 6.5% earlier this month. Patel attributed the maintenance of the neutral stance to “several uncertainties that are present”. He flagged six key risks to the central bank’s inflation forecast of 4.7-4.8% for H2FY19 and 5% for Q1FY20.
“The outlook for inflation is faced with both upside and downside risks such as considerable uncertainty around the full impact of MSP changes on inflation, which will be known only in the coming months when the procurement details are available and execution takes place; susceptibility of crude oil to both supply and demand shocks; continuing volatility in financial markets; a further rise in inflation expectations of households which has the potential to feed into wage & salary increases and induce cost-push pressures; fiscal slippage at the Centre and/or state levels; and second round effects on inflation on account of the staggered HRA (housing rent allowance) revisions by various state governments, though the direct statistical impact of HRA revisions will be looked through,” he said.
Deputy governor Viral Acharya wrote that the hardening in crude prices, inflation excluding food and fuel, hardening in households’ inflation expectations and the MSP rises led him to vote in favour of a second rate hike. “Factoring in these , I am more concerned about upside risks materialising than downside risks,” he said, adding, “The rate hike of June followed by another rate hike will help rein in demand pressures and manage inflation expectations.” Voting for a rate hike, RBI executive director Michael Patra pointed to a loss of credibility for the MPC if it was unable to anchor inflation expectations. Ravindra Dholakia, the only MPC member who voted against a rate hike, cited a recent softening in crude prices, reductions in GST rates and a likely growth slowdown.