(LiveMint)
The monetary policy committee (MPC) of the Reserve Bank of India (RBI) raised the repo rate by 25 basis points on 6 June in its last policy review, citing major risks to Consumer Price Index (CPI)-based inflation from crude prices, elevated inflation expectations, HRA provisions by states and increase in minimum support prices (MSPs) of major kharif crops. The MPC, however, sounded more sanguine on growth because of improved capacity utilization and credit offtake, supported by healthy consumption demand.
Since the last policy meeting, the price of Indian basket of crude has not changed much. Currently, it is hovering near $71-72 per barrel. Results of RBI’s latest inflation expectations survey are still not out, but we expect inflation expectations to stay elevated as CPI has surged by 42 bps and core CPI by 56 bps between April and June 2018. On the state government front, Maharashtra has already announced a pay hike for its employees from Diwali (November 2018) following the recommendations of the Pay Commission.
Possibility of similar steps by other state governments has increased the probability of another bout of wage-push inflation during 2018-19. While higher MSPs need not translate into higher food inflation given the dynamics of procurement and demand-supply mix, an erratic and patchy rainfall this year certainly poses a risk to food inflation. Until 20 July, the area under kharif crops is down by 9.3% (y-o-y), due to rainfall deficiency in East India, Uttar Pradesh, Bihar and parts of Gujarat.
