MPC Meet :Urjit Patel & Viral Acharya Said On Inflation

RBI, monetary policy committee (MPC) had announced to keep the repo rate stable at 6% after the review on account of inflation fears. The minutes of RBI MPC meeting released on Wednesday underscore the growing menace of inflation. Even the RBI governor Urjit Patel categorically spoke on it and expressed an series of upside risks.

“CPI inflation rose for the sixth consecutive month in December. Food inflation increased further even as pulses continued to deflate. Fuel group inflation rose sharply in November and remained elevated thereafter. With rising input prices, inflation is getting increasingly generalised. Inflation expectations have remained elevated,” he said.

Five Things That RBI Governor Urjit Patel Said
1. On Inflation: Looking forward, inflation in the baseline scenario is projected to remain above the target of 4 per cent throughout 2018-19.

2. On Risk To Inflation: There are several upside risks to inflation, especially from the staggered impact of HRA increases by various state governments (the direct effect on the CPI of the pure statistical adjustment has to be looked through, but not the second round effects driven by, say, expectations); policy for arriving at the minimum support prices for Kharif crops; and the fiscal slippage as indicated in the Union Budget, which also has attendant “crowding-out” implications with regard to the cost of private domestic credit. The evolving global macro backdrop is a concern.

3. On Fed’s Monetary Policy: Tighter monetary policy by systemically important central banks, viz., the US Federal Reserve, combined with a looser US fiscal policy stance has the potential to imbue financial turbulence with concomitant consequences, especially for emerging markets.

4: On Oil Prices: International crude oil prices increased significantly between December and early February, which is worrisome. However, oil prices could moderate if there is a strong supply response. Effective supply management by the government, as in the recent past, could help in keeping food inflation under check. Further, overall capacity utilisation in industry, according to surveys, is restrained.

5. On Domestic Economic Growth: Domestic economic growth impulses are strengthening. Manufacturing activity has picked up. The manufacturing purchasing managers’ index (PMI) expanded for the sixth consecutive month in January, led by new orders. There are also early signs of revival of investment activity. Many service sector indicators have shown robust growth such as commercial vehicle sales, domestic & international air passenger traffic, and foreign tourist arrivals. The services PMI expanded sequentially in December and January, supported by higher business activity. Credit growth is picking up and is also becoming broad-based. GVA growth in 2018-19 is forecast at 7.2 per cent, which will be a significant improvement over the current year.

Things That RBI’s Deputy Governor Viral Acharya Said On Inflation

1. Headline inflation prints since last policy have been significantly above the target. While a part of this is statistical due to the Centre’s HRA implementation, there has also been a rise in inflation sans HRA. A major concern has been the steep rise in oil prices coincidentally with (i) global rates and commodity cycles having turned up; and (ii) our fiscal deficit having overshot for this year and likely to do so next year too.

2. Even without factoring in the States’ staggered HRA implementation and MSP rises announced in the Union Budget, risks to inflation seem clearly tilted on the upside. Indeed, RBI’s projections at 12-14 months in future put headline inflation by more than 50 basis points above the target (by then the statistical effect of Centre’s HRA implementation would have completely waned).

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