MPC Sees Inflation at 5% in FY18
“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.”
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.