RBI MPC minutes: Four key factors behind rising inflation which worry Urjit Patel

RBI Monetary Policy Committee minutes: RBI Governor Urjit Patel said yesterday after the release of the latest Monetary Policy Committee minutes (MPC) that he was cautious over inflationary pressures and decided to keep policy rate on hold in the latest RBI meeting held on February 7.

Notably, the Reserve Bank of India has kept the repo rate unchanged for the third time in a row at 6% due to concerns of rise in inflation on account of increasing global crude oil prices, impact of housing rent allowances (HRA) and the India’s precarious fiscal slippages. In the MPC minutes released yesterday, RBI noted that  the inflation outlook is clouded by several uncertainties and various pressures point towards an upside risk.  In its monetary policy committee meeting, RBI has raised inflation forecast for the fourth quarter of the current fiscal ending March to 5.1%. Further, the central bank has pegged inflation between 5.1% and 5.6% for the first half of next financial year. We take a closer look at the key concerns pointed out by RBI with regard to rising inflation, and the key factors as highlighted in the RBI Monetary Policy Committee minutes.

Impact of HRA increases
RBI says that HRA increases by various state governments is a potential upside to rising inflation. The central government had announced an HRA hike in the range of 106 percent to 157 percent from July-17 to central government employees, post which the apex bank RBI had said that the staggered impact of HRA increases by various state governments poses upside risk to inflation. Interestingly, RBI executive director Michael Patra says that inflation has slightly eased after July-17, as the effect of HRA implementation weans off, and a further rise in inflation may warrant a series of rate hikes.

Hike in kharif crops MSP announced in Union Budget 2018
After Finance Minister Arun Jaitley  announced an increase in minimum support price for kharif crops to at least at one and half times of their production cost as a step towards doubling farmers income by 2022, RBI noted in its MPC minutes that the move could lead to a rise in inflation. RBI notes that the move poses a risk to rise in inflation, although the exact magnitude of its impact on inflation cannot be fully assessed at this stage. 

Rising global crude oil prices
RBI says that a pick-up in global growth may exert further pressure on the already rising crude oil and commodity prices which will have ramifications for domestic inflation. “Crude oil prices touched a three-year high as production cuts by the OPEC coupled with falling inventories weighed on the global demand-supply balance,” RBI notes.

Fiscal slippage
RBI is concerned about India’s fiscal slippages, especially after Finance Minister Arun Jaitley revised the fiscal deficit target upwards to 3.5% as against 3.2% for FY17-18. “Fiscal slippage as indicated in the Union Budget could impinge on the inflation outlook. 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,” RBI said in its minutes.