RBI minutes: MPC concerned over rising inflation


In the minutes of MPC released on Wednesday, Patel said that in addition to creating inflationary pressures the "high fiscal deficit has attendant "crowding-out" implications with regard to the cost of private domestic credit".

Michael Debabrata Patra, RBI Executive Director, who voted for a 25 basis points increase in repo rate to 6.25 per cent, said several drivers of inflation are firing at the same time - upward adjustments of domestic POL (petroleum, oil and lubricant) prices in response to the hardening of global crude prices, imminent MSP increases, fiscal slippage, and customs duty increases. The central bank had raised its March quarter Consumer Price Index (CPI) inflation forecast to 5.1% and projected an inflation range of 5.1-5.6% in the first half of the next fiscal year. I would like to see whether this downside risk plays out in next few months to have a firmer grip on the medium-term inflation trajectory.

He argued that amid pickup in growth, the real policy rate is below 1% if the statistical reversal of the HRA effect is looked through, and could fall further. "This is completely misaligned with underlying fundamentals and the economy's prospects at a time when activity is picking up". As per the minutes, Patra voted for a 25 basis points increase in the policy rate "in view of the prolonged period of status quo, a series of rate increases may be warranted to remove excessive accommodation". "The time to begin is upon us", he added. "Fixed income markets are telling us that we have fallen behind the curve", explained Patra.

We expect inflation to head towards 5.85% by June 2018 (5.6% as per RBI's upper-bound in 1HFY19). Dholakia (dove) "The fiscal space to accommodate future higher oil price shocks seems to be absent given the slippage in the Union budget for 2018-19".

However, Patra's stance was vindicated when inflation (after factoring in an increase in House Rent Allowance, or HRA, of government employees) still exceeded the year-end target.

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During the day, the yields rose up to 7.80% as minutes of Federal Open Market Committee (FOMC) meeting also hinted at rate hikes, which sent the USA treasury yields to a four-year high of 2.96%.

"Impact of the increase in customs duty and MSP proposed in the budget on the headline inflation is again uncertain", said Dholakia. "The next few months of inflation and growth data will be key to determining the evolution of policy rates", said Dr Viral V. Acharya. Most of the six members of the monetary policy committee turned hawkish at the February 6-7 meeting, when the central bank chose to keep the benchmark repurchase rate at 6 percent.

Finally, Urjit Patel, RBI Governor, who too voted for keeping the policy repo rate on hold while maintaining a neutral stance, said looking forward, inflation in the baseline scenario is projected to remain above the target of 4 per cent throughout 2018-19.

The continuing rise in food and fuel prices kept India's annual retail inflation rate over the five per cent mark in December 2017, and last month, at well above the RBI's median inflation target of 4 per cent.

"The economic recovery is also at a nascent stage and calls for a cautious approach at this juncture", Patel said.