MUMBAI: Call it RBI Governor Dr Urjit Patel’s candid confession yet on missing the inflation target, which is the apex bank’s key responsibility area.
By Patel’s own admission, RBI has been “away from its 4 per cent inflation target for several months now”, which is why the Monetary Policy Committee concluded that only a 25 bps repo rate hike can prevent inflation from “drifting away” farther.
Patel and team believes we should now fork out more towards EMIs in order to pay less for fruits, veggies and all goods and services in future.
RBI has to maintain headline inflation at 4 per cent, but can tilt 2 per cent either side. This mandate came into effect in October 2016, but perhaps for the first time, the Governor openly commented on falling behind the curve.
“The main reason for changing the policy rate is to ensure that on a durable basis, we come to and maintain the 4 per cent target. We’ve been away from the 4 per cent target for several months now,” Patel said, “We took two steps, one in June and one in August, to maximise our chances that we don’t drift away from 4 per cent and in fact, we move towards 4 per cent.”
Core inflation, excluding food and fuel, is higher at over 6 per cent for some time now, but RBI simply will not mind it. “If you go by that, there will be core, core-core inflation and other sub components...Our mandate is CPI-headline inflation target,” Patel said. For context, headline inflation breached 5 per cent in June.
Despite Wednesday’s rate hike, retail inflation will likely print at 4.6 per cent this quarter, 4.8 per cent in the second half of FY19, and 5 per cent in Q1FY20 — well above the 4 per cent band, giving the MPC more sleepless nights.Why? Because of uncertainty due to government’s MSP dole to farmers and its impact on inflation. Add to this the higher oil prices and volatility in global markets. Worsening the situation is the threat of fiscal slippages at the Centre and/or states, and crowding out of private investment affecting inflation. All of this forced the MPC to stay neutral, even if it’s an unclear territory.
“There’s a fair bit of uncertainty around the CPI prints and therefore, it was important that we kept our options open depending on the prints coming in over the next few months, given the volatility of the prints coming in. So that’s why we emphasise that we would need to monitor the domestic inflation outlook in the coming months very carefully. For these reasons, the stance is retained at neutral and the risks around the projections are balanced,” Patel said.
Corporate earnings are robust, investment activity is picking up, FDI flows increased, output gap has virtually closed implying healthy economic activity, but domestic inflation could play spoilsport in the coming months. Rising global trade tensions could be a “grave risk to near-term and long-term global growth prospects.”