RBI likely to stay put on rates, flag concerns on food inflation, oil’s surge

 RBI likely to stay put on rates, flag concerns on food inflation, oil’s surge

The Reserve Bank of India (RBI) is likely to keep benchmark rates unchanged while signposting concerns over oil prices and food inflation at its first bimonthly policy review in the new financial year. 

An ET poll conducted among 23 market participants suggests that the central bank may be headed into an extended pause on rate action even though the US Federal Reserve is penciling in higher borrowing costs in the world’s biggest economy toward the latter half of the year. Should the Monetary Police Committee (MPC) of the RBI hold rates at what they now are at its conclave beginning April 4, it would be the fourth such consecutive policy decision. 

The MPC is expected to strike a balanced approach as inflation in the January-March quarter (Q1-2018) has undershot its target,” said Anubhuti Sahay, chief India economist at Standard Chartered Bank. “Additionally, growth recovery… in a nascent stage is also likely to keep the MPC away from striking a hawkish note. But it will remain vigilant of risks to inflation and fiscal deficit on the impending announcement on minimum support prices (MSP).” 

This year’s Budget made a key announcement, pegging the MSP for farmers at 1.5 times the cost. This move could well be inflationary as prices available to farmers for their harvest could increase by about 15 per cent, according to an estimate by the government’s think-tank NITI Aayog. This may result in an increase in farmers’ income by 24 per cent. 

“Elevated oil prices, substantial increases in MSP, and Pay Commission payouts collectively pose a risk to inflation estimates,” said Abheek Barua, chief economist at HDFC Bank. “There is enough inflation pressure in the system and those risks could well materialise. The RBI can afford to stay neutral for now while the … beneficial base effect could operate after June.” 

India is grappling with twin deficits, with New Delhi spending more than its revenues and importing more goods than it is shipping out. Such a situation puts further pressure on consumer prices. “Inflation has been more moderate than earlier feared, although multiple risks remain,” said Saugata Bhattacharya, chief economist at Axis Bank. “Given this, the policy tone is unlikely to be more hawkish than before, but will keep its focus on the evolving risks.” 

Retail inflation, a key gauge considered by the six-member MPC while deciding its policy stance, was estimated to be 5.1 per cent during the Jan-March quarter. It has trended lower to 4.4 per cent in February. To be sure, this moderation could well mean a temporary reprieve. Since then, oil prices have surged, with Brent crude hovering around $70 a barrel. The majority of poll participants anticipate an extended pause, although the markets would be keen to know how individual members voted. 

“The interesting aspects of this policy will be the voting pattern of the MPC members as that might be a signal on future action probabilities,” said Bhattacharya from Axis Bank. “Also to be noted are the RBI’s economic forecasts and assessment in the Monetary Policy Report of risk factors such as fiscal developments and the external conditions.”

The Economic Times, New Delhi, 02nd April 2018