MPC Sees In­fla­tion at 5% in FY18

The Economic Times - - Econ­omy: Macro, Mi­cro & More -

“The change of stance from ac­com­moda­tive to neu­tral gives space to move ei­ther way,” she said. The im­pact of surg­ing oil prices on core in­fla­tion and po­ten­tial dis­rup­tion in global fi­nan­cial mar­kets from the US Fed­eral Re­serve’s move to raise in­ter­est rates in an un­pre­dictable Don­ald Trump ad­min­is­tra­tion, have made pol­icy mak­ing tricky.

A fall in do­mes­tic in­fla­tion in the re­cent past may have come due to de­mon­eti­sa­tion which crip­pled de­mand, so the ef­fect on prices may be tran­si­tory, RBI gov­er­nor Ur­jit Pa­tel told re­porters at a con­fer­ence. The six-mem­ber Mon­e­tary Pol­icy Com­mit­tee sees in­fla­tion ris­ing to 5% by the end of fis­cal 2018, which is above the tar­geted 4%, with a 2 per­cent­age point band on ei­ther side. “The com­mit­tee wanted to em­pha­sise that in a cal­i­brated man­ner, and there­fore to make it on a durable ba­sis, we need to move closer to 4% (in­fla­tion tar­get),” said Pa­tel. “The non-food, non-fuel part of the CPI in­dex has been stub­born at about 4.8-4.9% since Septem­ber and there­fore that's the kind of risk that is there. And if you com­bine it with the other risks that I have told you about, the com­mit­tee felt that we needed all the flex­i­bil­ity that we could muster.”

The repo rate, the rate at which it lends to banks is kept at 6.25%, and the re­verse repo rate, the rate at which it pays banks for de­posit­ing sur­plus funds, is at 5.75%. The ma­jor­ity of mar­ket par­tic­i­pants in an ET poll had ex­pected RBI would lower the pol­icy rate by 25 ba­sis points. All other ra­tios also re­main un­changed.

“Look­ing ahead, we ex­pect in­fla­tion to av­er­age above its tar­get, at 5% in FY18, and thus ex­pect pol­icy rates to re­main un­changed at 6.25% through­out 2017 against our ear­lier ex­pec­ta­tions of a 6% ter­mi­nal rate,” said Sonal Varma, econ­o­mist at No­mura Se­cu­ri­ties.

In­fla­tion pres­sures will stem from oil prices, global fi­nan­cial mar­ket de­vel­op­ments and ef­fect of house rent al­lowances un­der the 7th Cen­tral Pay Com­mis­sion award, which have not been fac­tored in the base­line in­fla­tion path, RBI said.

“I think this is mainly driven by our con­cern about global in­fla­tion that is pick­ing up es­pe­cially on fuel and met­als side,” said Vi­ral Acharya, deputy gov­er­nor at RBI who is a mem­ber of the MPC. “There is also a risk that this could be cou­pled with a strength­en­ing of the dol­lar and it could feed into sig­nif­i­cant in­fla­tion for our econ­omy.”

GLOBAL FAC­TORS

Fi­nan­cial mar­kets are brac­ing for a rough ride as the Fed­eral Re­serve may raise in­ter­est rates thrice this year and the rates in in­ter­na­tional mar­kets have hard­ened ex­pect­ing a fis­cal push from Pres­i­dent Don­ald Trump to re­vive the US econ­omy. While RBI has re­duced the eco­nomic growth fore­cast for the cur­rent fis­cal by 20 ba­sis points, to 6.9% ver­sus the ear­lier 7.1%, it es­ti­mated the gross value added (GVA) for fis­cal 2018 at 7.4%. Gov­er­nor Pa­tel be­lieves that though the MPC has ab­stained from re­duc­ing rate, there is enough scope for banks to lower lend­ing rates as they had not passed on the en­tire pol­icy rate cut by the RBI in the last year or so, which is about 150 ba­sis points.

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