Three reasons why RBI raised inflation forecast, kept repo rate unchanged at 6%

Published On: 06, Dec 2017 | Source:

In its bi-monthly policy review today, the RBI kept key policy rates unchanged, much in line with expectations, as the central bank’s concerns over inflation rising through the year seem to be coming true. Notably, RBI has raised its expected inflation estimate on the entire band by ten basis points to 4.3%-4.7% in Q3 and Q4 from 4.2% to 4.6% earlier. RBI also noted that the global crude oil prices are on the rise and the impact of HRA by the Central Government is putting pressure on inflation. “Crude oil prices touched a two-and-a-half-year high in early November on account of the Organisation of the Petroleum Exporting Countries’ (OPEC) efforts to rebalance the market,” RBI said.

“The October bi-monthly statement projected inflation to rise and range between 4.2-4.6 per cent in the second half of this year, including the impact of increase in house rent allowance (HRA) by the Centre. The staggered impact of HRA increases by various state governments may push up housing inflation further in 2018, with attendant second order effects,” RBI said in its note.

Earlier, analysts said that higher inflation, which may even breach its 4% target in the next few months, rising oil prices and the impact of the seventh pay commission would make the central bank to keep the repo rate on hold for the second time, and for the third time in February too.

“The decision of the MPC (Monetary Policy Committee) is consistent with a neutral stance of monetary policy in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4 per cent within a band of +/- 2 per cent, while supporting growth,” RBI said.

RBI points out that  going forward, the inflation path will be influenced by three key factors. “First, moderation in inflation excluding food and fuel observed in Q1 of 2017-18 has, by and large, reversed. There is a risk that this upward trajectory may continue in the near-term,” noted RBI. Secondly, RBI says that the impact of HRA is likely to peak in the month of December. “Third, the recent rise in international crude oil prices may sustain, especially on account of the OPEC’s decision to maintain production cuts through next year. In such a scenario, any adverse supply shock due to geo-political developments could push up prices even further,” RBI said in the report.