Inflation fears force RBI to hold key rates

Mumbai: The Reserve Bank of India (RBI) on Wednesday kept its key policy rate unchan-ged amid concerns regarding upside risks to inflation with one member of the monetary policy committee (MPC) arguing in favour of a 25 basis point hike in interest rates.

While maintaining its neutral stance on the monetary policy, RBI has also cautioned against any sustained deviation from the fiscal deficit path as it could have an adverse impact on inflation.

“Looking ahead, the MPC noted several upside risks to inflation trajectory. The firming up of international crude oil prices, the hardening of non oil industrial raw material prices and stronger pricing power among firms. While inflation will likely move in the range of 5.1-5.6 per cent in the first half of FY19, favourable base effects including the unwinding of the seventh central pay commission HRA impact combined with expectation of normal monsoon and effective food supply management may see inflation easing to 4.5-4.6 per cent in the second half with the risk tilted to the upside,” said governor Urjit Patel. The central bank expects the consumer price inflation to hit 5.1 per cent in the current quarter in view of the increase in fuel prices.  

Stating that inflation outlook is clouded by several uncertainties on the upside, the Reserve Bank said the fiscal slippage as indicated in the Union Budget could impinge on the inflation outlook in the country.

Apart from the direct impact on inflation, fiscal slippage has broader macro-financial implications, notably on economy-wide costs of borrowing which have already started to rise. This may feed into inflation.

“Despite revising the trajectory of inflation up, the policy chose to remain neutral and this could mean that unless things go really awry (particularly in crude oil markets or the domestic fiscal deficit) and push inflation way above the projected trajectory, the Reserve Bank could stay on hold for the next couple of policies. However, as global monetary policy tightens, we see the chance of a domestic rate hike by the RBI to synchronise with the global cycle and this is likely to be in the last quarter of calendar year 2018,” said Abheek Barua, chief economist at HDFC Bank.