Union Budget 2018 may fuel inflation going ahead, notes MPC

The Reserve Bank of India (RBI) kept key policy repo rate unchanged at 6 percent at the Sixth and last Bi-monthly Monetary Policy for FY18 on Wednesday continuing with its neutral stance.

The Reserve Bank has also revised the inflation estimates at 5.1 percent in Q4 due to factors including pick up in food prices and international crude oil prices.

The MPC noted that inflation outlook is clouded and while stating the reasons for the same the policy document said, “the Union Budget 2018-19 has proposed revised guidelines for arriving at the minimum support prices (MSPs) for kharif crops, although the exact magnitude of its impact on inflation cannot be fully assessed at this stage.”

The Central Bank though declined to provide the exact impact of an increase in minimum support price for Kharif crops announced in the Union Budget 2018-19. Hike in custom duty rates for several items and fiscal slippage may also have an impact on inflation going forward

It also noted that financing conditions could be adversely impacted by the normalisation of monetary policy by developed economies and convergence of domestic fiscal developments may weaken the confidence of external investors.

The Reserve Bank welcomes the Budget focus on rural and infrastructure sectors that would support rural income and investment and in turn provide a further push to aggregate demand and economic activity.

RBI also cautioned that Union Budget is likely to fuel demand but deterioration in public finance may reduce private financing and investment.

Five members of the Monetary Policy Committee, including RBI Governor Urjit Patel, voted in favour of maintaining status quo while executive director Dr. Michael Debabrata Patra was the lone dissenter wanting the key rate to be hiked by 25 basis points.moneycontrol