Why the RBI says it will be watching inflation closely while keeping interest rates constant

The Reserve Bank of India said that there were five major factors that could influence its inflation outlook and that it would be watching their effect closely.

By: Express Web Desk | Published: October 5, 2018 3:15:54 pm
RBI governor Urijit Patel Reserve Bank of India (RBI) Governor Urjit Patel attends a news conference after the monetary policy review. (File/Reuters photo)

The Reserve Bank of India in its monetary policy released Friday announced that it was leaving key rates unchanged. Repo rate has been left at 6.50 percent while reverse repo rate has been left at 6.25 percent. The central bank has said its outlook for inflation was influenced by multiple factors and it will be keeping a close eye on five major factors:

Effect of crop price rise: The RBI said that the government announced in September measures aimed at ensuring remunerative prices to farmers for crops, but there’s still uncertainty about their exact impact on food prices.

The oil price factor: The RBI said that oil prices “remain vulnerable to further upside pressures, especially if the response of oil-producing nations to supply disruptions from geopolitical tensions is not adequate.” It observed that the central government’s decision to cut excise duty on petrol and diesel will moderate retail inflation.

Global markets could affect inflation: The RBI said that the volatility in stock markets continued to “impart uncertainty to the inflation outlook.”

Input costs rise: A sharp rise in input costs, combined with rising pricing power, poses the risk of retail prices for both goods and services being raised.  The RBI noted that firms covered in its industrial outlook survey had reported input costs becoming firmer in Q2 of 2018-19 and Q3. But since global commodity prices other than oil have moderated, it should mitigate the adverse influence on input costs, the central bank observed.

Fiscal slippage: The RBI said if there is a fiscal slippage at the centre or state levels, it will have a bearing on the inflation outlook, besides heightening market volatility and crowding out private sector investment.

“Finally, the staggered impact of HRA revision by the state governments may push up headline inflation. While the MPC will look through the statistical impact of HRA revisions, there is need to be watchful for any second-round effects on inflation,” the central bank said.

“The inflation outlook calls for a close vigil over the next few months, especially because the output gap has virtually closed and several upside risks persist,” it said.

The central bank’s Monetary Policy Committee said that “global headwinds in the form of escalating trade tensions, volatile and rising oil prices, and tightening of global financial conditions pose substantial risks to the growth and inflation outlook. It is, therefore, imperative to further strengthen domestic macroeconomic fundamentals.”

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