New Delhi: Later this week, the Reserve Bank of India’s (RBI) Monetary Policy Committee will meet to provide its assessment of inflation in India and, accordingly, set the repo rate.

At the meeting, they will consider various factors that threaten inflation. It was based on one of these factors—the increase in minimum support price (MSP) for crops—that the RBI had raised the repo rate earlier this year in August. However, a new study suggests that the RBI’s fears may have been overstated and the move could hurt farmers.

In a paper published in the latest Economic and Political Weekly, S. Mohanakumar and Premkumar examine the relationship between the MSP (a guaranteed price provided by the government for farmer’s produce) and inflation. Analyzing data from 2005-06 to 2017-18, they find that there is no statistically significant relationship between MSP for major crops (wheat, rice and cotton) and inflation. They argue that the lack of relationship is partly because many farmers do not even sell their produce at MSP.

They point to a NITI Aayog study which revealed that only 10% of India’s farmers are even aware of MSP before they sow their crops.

Consequently, authors believe the RBI’s response to hike the repo rate was inappropriate and could backfire. Since farmers rely heavily on credit for their production, a rate hike which increases the cost of credit will increase the supply price of agricultural commodities, according to the authors.

The increased cost of borrowing may also offset gains for farmers from the increase in MSP.

More broadly, the authors argue that the RBI’s rate hike could aggravate India’s agriculture crisis and even hurt small non-agricultural businesses.

Also read: Minimum Support Price and Inflation in India,

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