RBI policy: 6 reasons why inflation may not ease anytime soon
The proposed increase in a customs duty in Budget on a number of items may increase inflation.
The RBI noted these six factors that may bring uncertainty to inflation.
1) The staggered impact of housing rent allowance (HRA) increases by state governments may push up headline inflation further over the baseline in 2018-19, and potentially induce second-round effects, the RBI said. A study by BofA-ML on recent inflation print showed that fuel and light and housing had breached the headline 5.2 per cent, accounting for 22 per cent of inflation. It noted that 90 per cent of the 3.55 per cent increase in housing inflation between June and December was a result of the statistical impact of the increase in (HRA) for Central government employees on the 7th Pay Commission recommendation.
2) The RBI has partly factored in the likely impact of a rise in the minimum support prices (MSPs) for kharif crops on inflation. The exact magnitude of its impact on inflation cannot be fully assessed at this stage, RBI said. UBS expects the proposed hike in MSPs (support prices) for crops at 1.5 times their cost of production could add 15-20 bps to CPI inflation. Nomura India expects, on the other hand, believes that every 1 per cent rise in MSP adds nearly 10-15 bps to headline CPI inflation. We doubt the actual MSP rise will be as high as the headline (cost 50 plus) suggests, but this is an upside risk to inflation, Nomura India said.
3) A pick-up in global growth may exert further pressure on crude oil and commodity prices with implications for domestic inflation, RBI said. India’s significant dependence on oil imports -- around 70 per cent of oil requirement is imported -- could stoke inflation. While, the RBI expects inflation to average at 5.1 per cent in Q4FY18, Nirmal Bang Institutional Equities sees CPI inflation for January 2018 to at 5.36 per cent. The Brent spot price has moved to a three year high of $71.1 per barrel in January 2018 from $44.7 per barrel in June 2017 – an increase of around 59 per cent. This increase is primarily a result of Opec’s decision to continue with the ongoing production cut through 2018
4) 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, the RBI said. "On global front, the Fed in its recent latest monetary policy meeting has cemented expectations of three rate hikes for 2018 and has kept the room open for more in case inflation surprises on upside," Edelweiss Securities said in a note.
5) Fiscal slippage has broader macro-financial implications on inflation, notably on economy-wide costs of borrowing which have already started to rise. This may feed into inflation, the RBI said.
6) The proposed increase in a customs duty on a number of items may increase inflation.