RBI monetary policy: MSP hike shouldn’t be a worry on inflation front; here’s why

In wake of minimum support price (MSP) getting hiked by 1.5 times of production costs for rabi crops this season, in the latest budget by the Finance Minister, the fear may all the more aggravate for the central bank. However, a study by the Economic Research Department of State Bank of India (SBI) discounts the fears.

Written by FE News Desk

February 7, 2018 11:37 IST

Budget 2018: The Union Budget announced on Thursday is the vision taken forward by the government, with special focus on education, agriculture, health and social protection for the masses. (PTI)

The Monetary Policy Committee (MPC) headed by RBI Governor Urjit Patel is scheduled to announce its 6th bi-monthly monetary policy decision at 2:30 pm on Wednesday. The 6-member committee will announce its decision amid presumptions that the key interest rates will maintain status quo in consideration of firming inflation. In wake of minimum support price (MSP) getting hiked by 1.5 times of production costs for rabi crops this season, in the latest budget by the Finance Minister, the fear may all the more aggravate for the central bank. However, a study by the Economic Research Department of State Bank of India (SBI) discounts the fears saying such a rise in MSP will have minimal impact on inflation. The retail inflation, based on Consumer Price Index CPI), was 4.88 percent in November. In December 2015, it was 3.41 percent. Fixation of Minimum Support Price (MSP) for agriculture commodities over the production cost will have minimal impact on inflation, said a report of SBI’s Economic Research Department (ERD).

“We believe the impact on inflation will be minimal. The long run trend of growth of MSP of paddy, bajra and wheat with food inflation suggests that the degree of relationship between them is weak,” IANS cited the ERD saying in a report. “RBI empirical study conducted on examining long-run impact of hikes in MSP of food crops, namely, rice and wheat on food inflation found that it was not as ‘overbearing as were generally perceived’.” The report also said the debate in public domain over fixation of MSP over the production cost –either A2+FL or C2 — would be meaningless as long as the government could compensate farmers over and above prevailing gap between the market price and MSP of that particular crop.

“In fact, it is entirely possible that MSP based on C2 imputed price could be higher or lower than market price and hence what is more important is to look for market prices and not MSP,” IANS cited the report saying. The government decision to supplement the fixation of MSP with a market compensation scheme was the best scheme under the current circumstances, the research said.

This article was first uploaded on February seven, twenty eighteen, at thirty-seven minutes past eleven in the morning.