The Reserve Bank of India (RBI)’s monetary policy committee (MPC) is likely to keep interest rates unchanged on Wednesday as the risk of inflation breaching the central bank’s 4% target again has heightened, say economists.
Of the 15 economists surveyed by Mint, 14 expect the central bank to keep the repo rate—the rate at which the central bank infuses liquidity in the banking system—unchanged at 6%. Only one expects a rate hike of 25 basis points.
“We expect MPC to keep rates on hold and strike a hawkish tone. We also expect MPC to highlight upside risks to inflation on higher oil prices and potential of sharper increases in MSP (minimum support price) in fiscal year 2019,” said Anubhuti Sahay, head of South Asia economic research, Standard Chartered Bank. “However, MPC in our view would await some clarity on these, especially amid a nascent economic recovery.”
In his 1 February budget speech, finance minister Arun Jaitley said the government will offer a MSP that’s 50% above the cost of production for remaining rabi (winter) crops as well as kharif (summer) crops.
While most economists see the MSP announcement as inflationary, others said that it’s best to wait for the implementation before ascertaining the impact on food prices.
Effective supply-side management of the farm economy, including moderate MSP increases, has been a key source of inflation control in recent years, said Gaurav Kapur, chief economist at IndusInd Bank.
“Going forward, any pressures on the cost of production would now get passed on to food prices more seamlessly, which on one side would help improve the terms-of-trade for the farms sector, but could also lead to higher and sticky generalized inflation,” he said.
The MSP announcement comes at a time when inflation as measured by the Consumer Price Index (CPI) has been accelerating and has topped 4%, which is the central bank’s medium-term target.
According to data from the Central Statistics Office (CSO), CPI inflation accelerated to 5.21% in December, the fastest pace in 17 months, from 4.88% in November and 3.41% in the same period last year. The rise was due to the statistical impact of a low base.
RBI forecasts CPI inflation to average 4.3-4.7% in the six months ending 31 March.
In the previous policy in December 2017, the MPC had noted several factors that threatened to quicken inflation in the near term, including rising food and fuel prices, increase in input costs and farm loan waivers in some states. It had also highlighted the partial rollback of excise duty on petroleum products and the decrease in revenue on account of the cut in goods and services tax (GST) rates posing dangers to the fiscal deficit target, which could push up inflation.
Economists expect MPC to flag risks due to deviation from the fiscal consolidation roadmap—the government revised upward the fiscal deficit target for fiscal 2018 and 2019—and also acknowledge widening tax base post GST rollout.
Hugo Erken, a senior economist at Rabobank, the only one in the poll expecting a rate hike, said that he has brought forward his forecast of expected hike in April-June quarter of 2018 to Wednesday. Even excluding the base effect, inflation pressures have built up on different fronts with surging oil prices as a key contributor, he said.
“Externally, there are risks, but also domestically, the dynamics are really picking up. Domestic consumption, purchasing managers index, construction activity, and even loan growth is recovering from deep red figures. Therefore, I believe India is able to close the output gap relatively fast (which does not bode well for inflation), and most likely much faster than the International Monetary Fund is expecting,” Erken said.
Some economists expect RBI to cut its growth forecast because of sluggish momentum in the first half of the fiscal year.
Sonal Varma, managing director and chief India economist at Nomura, expects RBI to revise its fiscal 2018 gross value added expectations from 6.7% to 6.5%.livemint