The Monetary Policy Committee (MPC) on its fifth bi-monthly meeting decided to keep the repo rate at the current 6 percent, keeping inflation in mind.
Prices of food and fuel, which affect the cost of living conditions, saw a rise in November. There was also an increase of housing inflation which took place after the implementation of higher house rent allowances for central government employees under the 7th Central Pay Commission award.
The rise in input costs indicate a rise in retail prices that might increase inflation. Sounding a caution on fiscal deficit, the MPC believes that rollout of farm loan waivers by select states, partial rollback of excise duty and Value Added Tax (VAT) in the case of petroleum products, and a decrease in the revenue on account of reduction in GST rates for several goods and services may widen the fiscal deficit. This, in turn, might lead to an inflationary situation.
Read more: Key takeaways from the MPC meet
Further risks to inflation in India could come from the broader financial volatility globally, in particular, US' policy stance on standing pat by its rate.
The rise in Consumer Price Index (CPI) inflation (excluding food and fuel) increased from July to September and remained steady in October to 3.58%. This was due to the softening of petroleum product prices as the central and state governments reversed them.
Fuel inflation, which has been on an upward trajectory since July, accelerated due to an increase liquefied petroleum gas (LPG), kerosene, coke and electricity prices.
Taking these factors into account, the MPC expects inflation to be in a range of 4.3-4.7 percent in Q3 and Q4 of this fiscal year. It gives a berth of up to 35 basis points for the HRA effect.
Also, accounting for the gap in industry output levels, the MPC decided to keep the policy repo rate on hold and monitor incoming data more carefully.The MPC believes that a seasonal moderation in prices of vegetables, and fruits and the recent lowering of tax rates by the goods and services tax (GST) Council could mitigate upside pressures on inflation.