Inflation driven by HRA, says RBI governor on status quo on interest rates

[] The Reserve Bank of India did not go in for a hike in policy rates, despite expecting a surge in inflation going forward, as the price rise is being driven by higher house rent allowance (HRA) to government employees, governor Urjit Patel has said

The Reserve Bank of India (RBI), on February 7, 2018, kept the repo rate unchanged at six per cent for the third time in a row, saying that higher government spending would accelerate inflation and warned of risks from wider fiscal deficit. Nearly 0.35 per cent of the current inflation is due to the house rent allowance (HRA) hikes, as per the 7th pay panel recommendations, RBI governor Urjit Patel said. Even if one were to look at the future, the inflation excluding the HRA will be 4.5 per cent in next fiscal, he added.

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“Taking all that into account, we felt that at this stage, without more data coming in, it was not necessary to change the repo rate or the stance,” Patel told reporters after the sixth bi-monthly review of the monetary policy in the current fiscal, ending March 31. He added that in the 2018-19 fiscal, there may be a few months or quarters when the inflation will be higher than the 4.5 per cent expectation. The RBI said it expects the headline inflation to be 5.1-5.6 per cent in the first half of next fiscal and cool down to 4.5-4.6 cent in the second half. It also upped the inflation forecast for the fourth quarter of the current fiscal to 5.1 per cent from the earlier expectation of 4.3-4.7 per cent inflation in the second half of the fiscal.

[] RBI keeps policy rate unchanged over inflation, fiscal deficit concerns

“Our projections are indicating that inflation has risen a little this quarter and will be at 4.5 per cent in FY2018-19. Therefore, there was no need for a change in this monetary policy. As the data flows over the next 2-3-4 months, accordingly, we will take a call on what has to be done,” Patel said. The resolution of the Monetary Policy Committee (MPC) also enlisted risks to inflation, which included fiscal slippages, spillover of HRA hikes as more states adopt the 7th pay panel suggestions, hike in custom duties on consumer durable items and rally in crude prices.

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On the fiscal stance of the government, he made it clear that if there are significant deviations from the path, the RBI’s task of meeting the four per cent inflation target will be ‘challenging’. He also acknowledged that the fiscal deficit number has been on a downward trajectory since 2014, when the Modi government came to power. The RBI had last cut its key rates in August 2017 and continues to be on the neutral stance for the policy, since adopting it in February 2017.

Patel said the sagging investment-to-GDP ratio is slated to rise and pointed to a jump in credit growth and higher capacity utilisations in the industry, as a discernible sign for that. He exuded confidence that credit growth to the industry will improve further on the bank recapitalisation and resolution of dud assets under the Insolvency and Bankruptcy Code.

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Category: Lifestyle

Debora Berti

Università degli Studi di Firenze, IT

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