RBI sees MSP hike as key risk to inflation
RBI increased its inflation projection to 4.8% in the second half of 2018-19, as against 4.7% predicted earlier, inflation in Q1 of 2019-20 is projected at 5%
New Delhi: The Reserve Bank of India (RBI) raised inflation projections for the second half of 2018-19 citing the impact of the increase in minimum support prices (MSPs) for kharif crops and the elevated crude oil prices. Retail inflation, measured by the consumer price index, is projected to be at 4.8% in the second half of 2018-19, as against the earlier projection of 4.7%. Inflation in Q1 of 2019-20 is projected at 5%. In the monetary policy statement on Wednesday, RBI announced an increase in the key repo rate by 25 basis points.
One basis point is one-hundredth of a percentage point.
Last month, the central government decided to fix MSPs at least 150% of the cost of production for all kharif crops for the sowing season of 2018-19.
“This increase in MSPs for kharif crops, which is much larger than the average increase seen in the past few years, will have a direct impact on food inflation and second round effects on headline inflation,” the RBI said. It added that a part of the increase in MSPs based on historical trends was already included in the June baseline projections and only the incremental increase in MSPs over these calculations will impact inflation projections.
“However, there is considerable uncertainty and the exact impact would depend on the nature and scale of the government’s procurement operations,” RBI said.
Besides MSP, RBI also flagged the elevated levels of crude oil prices and the rising inflation in non-food non-fuel items as risks to the inflation forecast.
“Inflation in items excluding food and fuel has been broad-based and has risen significantly in recent months, reflecting greater pass-through of rising input costs and improving demand conditions,” RBI said. However, a good overall monsoon augurs well for food inflation, RBI said, and so does the GST rate cut on many items.
RBI deputy governor Viral Acharya said it is a challenging task to gauge the impact of the MSP hike on inflation. “The increase in kharif crops is much higher than the average seen in the last few years. Such an increase operates through multiple channels in affecting inflation,” said Acharya in the post policy press conference.
“There is a direct impact on the prices of the targeted food items. There could be relative price adjustments within the food baskets. There could be an impact on rural wages. There could be generalization of all this through inflation expectations,” he added.
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