Urjit Patel led RBI cites risk factors, aims to contain inflation

The Reserve Bank of India's Monetary Policy Committee (MPC) today decided to increase the policy repo rate by 25 basis points, reiterating its commitment to achieving the medium-term target for headline inflation of 4 per cent on a durable basis. The central bank, however, retained its "neutral" stance as it aimed to contain inflation while not choking growth. 
 
According to the RBI statement, even as inflation projections for Q2 have been revised marginally downwards vis-à-vis the June statement, projections for Q3 onwards remain broadly unchanged. 
 
Citing several persisting risk factors, it said, First, crude oil prices continue to be volatile and vulnerable to both upside and downside risks. In particular, while geopolitical tensions and supply disruptions remain an upside risk to oil prices, the fall in global demand due to further intensification of protectionist trade policies could pull down oil prices.
 
Second, volatility in global financial markets continues to impart uncertainty to the inflation outlook. 
 
Third, households’ inflation expectations, as measured by the Reserve Bank’s survey, have risen significantly in the last two rounds, which could influence actual inflation outcomes in the months to come. 
 
Fourth, manufacturing firms polled in the Reserve Bank’s industrial outlook survey have reported hardening of input price pressures in Q2 of 2018-19. However, if the recent softening of global commodity prices persists, it could mitigate some of the upward pressure on input costs. 
 
Fifth, though the monsoon has been normal temporally so far, its regional distribution needs to be carefully monitored in the context of key CPI components such as paddy. 
 
Sixth, in case there is fiscal slippage at the centre and/or state levels, it could have adverse implications for market volatility, crowd out private investment and impact the outlook for inflation.
 
Seventh, uncertainty around the full impact of MSP on inflation will only resolve in the next several months once the price support schemes are implemented. 
 
Finally, the staggered impact of HRA revision by state governments may push headline inflation up. 

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While the statistical impact of HRA revisions will be looked through, there is need to watch out for any second-round impact on inflation, the statement added.