RBI expects inflation to rise to 5.1 pc, repo rate unchanged

RBI expects inflation to rise to 5.1 pc, repo rate unchanged

Mumbai: Reserve Bank of India Governor Urjit Patel during the National conference on Insolvency and Bankruptcy: Changing Paradigm in Mumbai on Aug 19, 2017. (Photo: IANS)

The Reserve Bank of India on Wednesday maintained status quo on key interest rates and predicted that retail inflation would rise to 5.1 per cent in the last quarter of this financial year.

In line with expectations, the RBI’s monetary policy committee (MPC) kept the repurchasing ~ or repo rate at which it lends to commercial banks ~ at 6 per cent.

The bank raised its Consumer Price Index (CPI)-linked inflation estimate from 4.3-4.7 per cent to 5.1 per cent, citing increasing crude oil prices globally and possible fiscal slippage because of certain proposals in Budget 2018-19.


The RBI policy stance remained “neutral”. However, analysts see any hawkish tone missing in this bi-monthly policy statement. The next RBI statement is on 5 April.

The MPC not only revised its CPI outlook but also lowered its estimate of GVA, or gross value added, for the current year from 6.7 per cent to 6.6 per cent. For the next fiscal, it was projected at 7.2 per cent from the earlier 7.3 to 7.4 per cent.

The MPC in its first comments on the Budget underlined the potential impact of fiscal slippage and new norms for minimum support price (MSP) for kharif crops on the CPI.

However, the upside risk to inflation could be checked by positives such as credit offtake, the economic growth picking up and large mobilisation from the primary market.

RBI Governor Urjit Patel observed that the inflation outlook extends beyond the current financial year and is likely to be shaped by crude oil prices as well as non-industrial raw material prices.

In the scenario of improving economic activity, the CPI for 2018-19 is estimated to be in the range of 5.1 per cent to 5.6 per cent in H1 which is likely to moderate to 4.5 per cent to 4.6 per cent in the second half of FY 18-19 but with upside risk.

However, the RBI says, “Inflation outlook is clouded by several uncertainties on the upside such as staggering impact of HRA (under the 7th Pay Commission which may push headline inflation further over and beyond 2018-19. Second, the pickup in growth is linked to crude oil prices.”

Commenting on the Budget, the MPC said, “The Union Budget proposes revised guidelines for arriving at the minimum support prices for Kharif crops although the exact magnitude of its impact on inflation cannot be fully assessed at this stage. Budget also proposes increase in customs duty. Fiscal slippage (increase in fiscal deficit target from 3.2 per cent to 3.5 per cent in the current FY) could also impinge on inflationary outlook.”

It said fiscal slippage has broader macro-financial implications, notably on economy-wide costs of borrowing which have already started to rise. However, the MPC has some goods words as well for the Budget.

“Economy is on a recovery path, including early signs of a revival of investment activity. Global demand is improving which should help strengthen domestic investment activity. Focus of Union Budget on rural and infrastructure sectors is also a welcome development as it would support rural economy and investment and in turn provide a further push to aggregate demand and economic activity,” it said.