RBI Sounds Inflation Alarm as Budget 2018 Breaches Fiscal Discipline

New Delhi: The Reserve Bank of India (RBI) after its bi-monthly monetary policy committee (MPC) meeting on Wednesday raised concerns towards rising inflation in the coming months aggravated by the government’s decision to raise fiscal deficit post Union Budget 2018.

“Fiscal slippage as indicated in the Union Budget could impinge on the inflation outlook. Apart from the direct impact on inflation, fiscal slippage has broader macro-financial implications, notably on economy-wide costs of borrowing which have already started to rise. This may feed into inflation. There is, therefore, need for vigilance around the evolving inflation scenario in the coming months,” said the RBI in a statement.

The apex bank kept the policy repo rate under the liquidity adjustment facility (LAF) unchanged at 6%. Consequently, the reverse repo rate under the LAF remained at 5.75% and the marginal standing facility (MSF) rate and the Bank Rate at 6.25%.

“The decision of the MPC is consistent with the neutral stance of monetary policy in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4% within a band of +/- 2 percent, while supporting growth,” said RBI.

The central bank enlisting other causes for possible increase in inflation said, “The staggered impact of HRA increases by various state governments may push up headline inflation further over the baseline in 2018-19, and potentially induce second-round effects. Second, a pick-up in global growth may exert further pressure on crude oil and commodity prices with implications for domestic inflation. Third, the Union Budget 2018-19 has proposed revised guidelines for arriving at the minimum support prices (MSPs) for kharif crops, although the exact magnitude of its impact on inflation cannot be fully assessed at this stage. Fourth, the Union Budget has also proposed an increase in customs duty on a number of items. The confluence of domestic fiscal developments and normalisation of monetary policy by major advanced economies could further adversely impact financing conditions and undermine the confidence of external investors.”