MUMBAI: The Reserve Bank of India’s Monetary Policy Committee (MPC) dog-whistled an inevitable event: prices will rise this year and inflation target may be breached. The underlying message for the government and investors is this: forget rate cuts, it’s time for ‘a series of rate hikes’.
Why so? The hawkish stance of lone dissenter Michael Patra, MPC member and executive director of RBI says it all. “The (inflation) target is in danger of getting out of reach and over the next few months, the upper tolerance band is under threat,” he noted.
The MPC is tasked with keeping inflation at 4%, with a band of 2% on either side. While all six members agreed that prices would rise, they maintained status quo in a 5-1 split vote. But Patra suggested increasing interest rates (25 bps to begin with) to keep prices low. Such a move would stall economic growth, which RBI Governor Dr Urjit Patel said was undergoing ‘nascent recovery.’ As such, the RBI’s task to balance growth and prices is no less than a thread-the-needle-type job.
The MPC is aware of several upside risks to inflation including the staggered impact of HRA increases, MSP for kharif crops, fiscal slippage both at centre and states, rising crude oil prices and global factors. But, Patel wants to wait for more economic data before biting the rate hike bullet, according to the minutes of the MPC meeting made public on Wednesday.
Early this month, the MPC kept the repo rate unchanged at 6%, but going by the commentary, it appears certain rate hikes would soon be a reality. According to Dr Viral Acharya, RBI’s deputy governor, inflation still looked tilted upside even without factoring in states’ staggered HRA implementation and MSP rises announced in the recent Budget.
GVA growth pegged at 7.2% in FY19
The MPC expects GVA growth to revive to 7.2% in 2018-19, compared to 6.6% in 2017-18. Inflation will range between 5.1 and 5.6% in the first half of the next fiscal, and at 4.5-4.6% during the second half
Eye on states’ fiscal discipline
The MPC cautioned that state finances were important to understand the extent of fisc-al slippages.
Though there’s substantial fiscal slippage by the Centre, performance of major states must be watched