In it’s bi-monthly policy meet today, RBI has hiked the key policy rate by 25 basis points to 6.5% on the back of rising inflation on account of MSP hike, GST rate cut, volatility in global financial markets, rising crude oil prices and several other factors. Notably, in June, the Reserve Bank of India had hiked the key rate by 0.25 percent to 6.25%. A rising inflation on account of several factors will weigh on the household budget.
RBI noted that retail inflation, measured by the on-year change in the CPI, rose from 4.9% in May to 5% in June, driven by an uptick in inflation in fuel and in items other than food and fuel even as food inflation remained muted due to lower than usual seasonal uptick in prices of fruits and vegetables in summer months.
“Adjusting for the estimated impact of the 7th central pay commission’s house rent allowances (HRA), headline inflation increased from 4.5% in May to 4.6% in June. Low inflation continued in cereals, meat, milk, oil, spices and non-alcoholic beverages, and pulses and sugar prices remained in deflation,” RBI said. According to the apex bank, crude oil prices have moderated slightly, but remain at elevated levels.
While the recent GST rate cut may translate to moderating on inflation in case of a pass-through to consumers, inflation in items excluding food and fuel is seen to be broad-based and has risen significantly in recent months, reflecting greater pass-through of rising input costs and improving demand conditions.
Interestingly, while fuel and light group inflation rose sharply, pulled up by liquefied petroleum gas and kerosene, electricity inflation has remained low. “The pass-through of global crude oil prices impacted inflation in domestic petroleum products as well as transport services. Inflation also picked up modestly in respect of education and health,” RBI said.
RBI has projected inflation at 4.6% in Q2, 4.8 per cent in H2 of 2018-19 and 5.0 per cent in Q1:2019-20, with risks evenly balanced. “Excluding the HRA impact, CPI inflation is projected at 4.4 per cent in Q2, 4.7-4.8 per cent in H2 and 5.0 per cent in Q1:2019-20,” said the report.
According to RBI, various indicators suggest that economic activity has continued to be strong. The progress of the monsoon so far and a sharper than the usual increase in MSPs of kharif crops are expected to boost rural demand by raising farmers’ income. Robust corporate earnings, especially of fast moving consumer goods (FMCG) companies, also reflect buoyant rural demand.
“Investment activity remains firm even as there has been some tightening of financing conditions in the recent period. Increased FDI flows in recent months and continued buoyant domestic capital market conditions bode well for investment activity,” RBI said. Based on its assessment, RBI retained GDP growth projection for 2018-19 at 7.4%, ranging 7.5-7.6% in H1 and 7.3-7.4% in H2, with risks evenly balanced; GDP growth for Q1:2019-20 is projected at 7.55%, said the report.