Wholesale price inflation (WPI) for June, also, rose to a four and a half year high of 5.72 per cent in June, up from 4.43 per cent in May.
On its part, RBI has projected inflation at 4.6 per cent in second quarter of 2018-19 (Q2FY19), 4.8 per cent in second half of 2018-19(H2FY19) and 5 per cent in first quarter of 2019-20 (Q1FY20), with risks evenly balanced.
Excluding the house rent allowance (HRA) impact, CPI
inflation is projected at 4.4 per cent in Q2FY19, 4.7-4.8 per cent in H2FY19 and 5 per cent in Q1FY20.
According to Jayant Manglik, president at Religare Broking, the RBI decision was along expected lines citing various risks to the inflation outlook.
“While acknowledging the recent cool-off in crude oil prices and the reduction in GST rates, which may have a disinflationary impact on inflation, the policy repo rate has been hiked in the backdrop of the uncertainty and volatility surrounding various inflation-impacting factors. However, by maintaining the monetary policy stance at neutral, we believe the RBI has retained some amount of flexibility as far as the rate decisions in the foreseeable future are concerned, which could be highly data dependent,” says Manglik.
Here are 8 key risks to inflation, according to RBI:
According to the statement issued by RBI, “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.”
The pass-through of global crude oil prices impacted inflation in domestic petroleum products as well as transport services. Import growth also accelerated largely due to an increase in crude oil prices.
Volatility in global financial markets
Volatility in global financial markets continues to impart uncertainty to the inflation outlook. “Global growth has become uneven and risks to the outlook have increased with rising trade tensions. Global trade has also lost some traction due to intensification of trade wars and uncertainty stemming from Brexit negotiations,” says RBI.
Impact of MSP
Uncertainty around the full impact of MSP on inflation will only resolve in the next several months once the price support schemes are implemented, says RBI in its policy statement.
The government has decided to fix the minimum support prices (MSPs) of at least 150 per cent of the cost of production for all kharif crops for the sowing season of 2018-19.
“This increase in MSPs for kharif crops, 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. A part of the increase in MSPs based on historical trends was already included in the June baseline projections. As such, only the incremental increase in MSPs over the average increase in the past will impact inflation projections. However, there is a considerable uncertainty and the exact impact would depend on the nature and scale of the government’s procurement operations,” RBI adds.
Households’ inflation expectations
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.
The June round of the Reserve Bank’s survey of households reported a further uptick of 20 basis points in inflation expectations for both three-month and one-year ahead horizons as compared with the last round.
Hardening of input price pressures
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,” the statement adds.
The manufacturing PMI showed that input prices eased slightly in July, although they remained high. Input costs for companies polled in Services PMI in June also stayed elevated.
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, says RBI. But despite that, the total sown area of kharif crops as on July 27 was 7.5 per cent lower than that a year ago.
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, RBI cautions.
The staggered impact of HRA revision by state governments may push headline inflation up. “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 policy statement said.