The increase in minimum support price of pulses and paddy in the current fiscal will have minimal impact on inflation as well as subsidies and is supportive of the Reserve Bank’s accommodative policy stance, says a report.
According to a report by Kotak Institutional Equities, the MSP increases would contribute to 40-45 bps increase in CPI inflation and these will be spread over a 2-4 month period and are unlikely to cause any adverse inflationary impact.
The government has sharply hiked the minimum support price (MSP) of pulses by up to Rs 425 per quintal for this year to boost output and check price rise, while making a modest raise of Rs 60 in paddy MSP to Rs 1,470 per quintal.
“The MSPs announced for the kharif season for FY2017 reflects the government’s resolve to deliver prudent economic policies and refrain from distributing fiscal largesse,” Kotak said.
The MSP is the rate at which the government buys the foodgrain from farmers.
“Despite flagging rural demand, we believe the government remains steadfast in its vision of increasing rural income by enhancing productivity rather than by adopting myopic income enhancing policies,” the report added.
The government is focused on keeping macroeconomic imbalances under control through prudent economic policies, the report said, adding that measures like the new crop insurance scheme, unified agriculture products markets, storage capacity expansion, irrigation fund, rural infrastructure development, will help in increasing income levels over the long term.
Regarding the RBI’s monetary policy stance, the report said that the hike in MSP bodes well for an accommodative stance even as the scope for further rate cuts is “limited”.
“We maintain our call for another 25 bps of rate cut through the rest of this year with the risks from Fed rate hikes, volatility emanating from faltering Chinese growth and debt situation, geopolitical concerns such as Brexit, and upticks in crude prices likely being key concerns of the RBI,” it added.