INSUBCONTINENT EXCLUSIVE:
NEW DELHI: The six-member monetary policy committee (MPC) on Wednesday hiked repo rate by 25 basis points to 6.5 per cent in a 5-1 vote,
and dropped enough hints at how various macro parameters are shaping up and what should one expect in upcoming policy reviews
Here are some key takeaways of the third bi-monthly policy review of 2018-19
Inflation projection for Q2 lowered marginallyA major concern for economists, CPI inflation is ruling at 5 per cent mark against RBI's
medium-term target of 4 per cent
And given the recent rise in input prices and currency depreciation, a build-up of inflationary pressure is likely in coming months
Economists were concerned that the increase in government spending ahead of the elections and the rise in MSP prices could even push
The RBI in its August policy slightly trimmed inflation foecast for the ongoing quarter at 4.6 per cent
The central bank said the actual inflation outcome has been slightly below the projected trajectory as the seasonal summer surge in
vegetable prices has remained somewhat muted in comparison with its past behaviour and fruits prices have declined.
"Even as inflation
broadly unchanged," the RBI said
MSP impact to depend on government's procurementTo address rising distress among farmers, the government last month announced an increase
in MSP of 14 crops sown in the summer
The RBI believes that the MSP hike, which is much larger than the average increase seen in the past few years, will have a direct impact on
food inflation and second round effects on headline inflation
But a part of the increase in MSPs based on historical trends was already included in the RBI's June baseline projections.
"As such, only
the incremental increase in MSPs over the average increase in the past will impact inflation projections
operations," it added.
Monsoon: So far, so goodEconomists noted that commodities such as sugarcane, potato, jute and rice-producing states
such as UP, Bihar, Jharkhand, West Bengal and Assam were seeing seasonal deficits of 30-40 per cent
But the recent rainfall has reduced the deficit
The RBI noted that 28 of the 36 sub-divisions received normal or excess rainfall whereas eight sub-divisions received deficient rainfall
compared with three last year.
The overall performance of the monsoon so far augurs well for food inflation in the medium term, the MPC
said.
GST rate cut to have only marginal impactThe central government recently reduced goods and services tax (GST) on 88 items
Union minister Arun Jaitley recently said the tax rate on other items outside the luxury-sin goods such as cement, air-conditioners and
large screen televisions could also be reduced as revenues rise.
The RBI said the recent GST rate cuts will have some direct moderating
impact on inflation "provided there is a pass-through of reduced GST rates to retail consumers".
On the flip side, the apex bank noted that
inflation in items excluding food and fuel has risen significantly in recent months, reflecting greater pass-through of rising input costs
and improving demand conditions.
Rural demand to lift consumptionThe RBI's assessment is the progress of the monsoon and a "sharper than
especially of FMCG companies, also reflect buoyant rural demand
Investment activity remains firm even as there has been some tightening of financing conditions in the recent period
Increased FDI flows in recent months and continued buoyant domestic capital market conditions augur well for investment activity," the
central bank stated.
Brexit, Sino-US trade war influencing commoditiesRBI noted that global trade has lost some traction due to
intensification of trade wars and uncertainty stemming from Brexit negotiations
It noted that base metal prices have fallen on the general risk-off sentiment triggered by fears of an intensification of trade wars
Gold prices too have softened on a stronger dollar.
"Inflation remained firm in the US, reflecting higher oil prices and stronger aggregate
Inflation has edged up also in some other major advanced and emerging economies, driven, in part, by rising energy prices and pass-through
effects from currency depreciations," it said.
Economists, meanwhile, noted that the recent agreement between the US and Europe to move
towards a zero tariff situation is a sign of relief.
Protectionist trade policies may pull down oil pricesRBI said that 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
Prices of crude oil have fallen of late, but not all experts are that optimistic
"Amid all the uncertainties surrounding the crude oil market, we expect prices to stay firm
Our forecasts are largely on back of consistently lower OPEC supplies during past few months while demand continues to remain strong
Prices may correct towards $62 for WTI, but the medium term trend still remains one of upside and could push the prices higher towards $75
and $81 over the next couple of quarters," said Gaurang Somaiya of Motilal Oswal Commodities
Economic growth projection retainedThe RBI has retained its GDP growth projection of 7.4 per cent for FY19
The central bank expects 7.5-7.6 per cent economic growth in H1 and 7.3-7.4 per cent in H2
A CLSA's study of 25 high-frequency data such as auto sales, airline passengers, coal production and export imort data showed strong
performance in June, but the numbers were somewhat influenced by a GST transition-led low base
PMIs and energy consumption indicators were also at multi-month highs.
