Nothing neutral about August policy of Reserve Bank of India
- 02-Aug-2018
- 0 Comments
Mumbai: Not everyone expected the Reserve Bank of India (RBI) to hike its policy rate on Wednesday, but its six-member monetary policy committee voted to do just that. Perhaps those who hoped for a status quo should look at this statement by RBI governor Urjit Patel at a press conference after the policy: “We have been away from 4% number for several months now. We took two steps, one in June and one in August, to maximize our chances that we don’t drift away from the target.”
The chart above shows why Patel made that statement.
Retail inflation, both at the headline level and for individual items, increased over the last three months. What is more relevant is that inflation rose faster in rural areas. At such a time, the hike in minimum support prices (MSPs) for kharif crops will only worsen this upward pressure on rural inflation.
Indeed, the central bank in its statement said the key reason for the rate hike was the proposed increase in MSPs and its impact on the headline inflation number. That said, RBI concedes it is challenging to accurately gauge the impact as it would depend on the procurement of crops by the government over the second half of this year.
