Statsguru: RBI hikes repo rate, projects inflation at 4.8% in H2 FY19

While food inflation has slowed of late, the RBI expects the recent hikes in minimum support prices (MSPs) announced by the government to have a direct impact on inflation

Last week, the monetary policy committee (MPC) raised the benchmark repo rate by 25 bps for the second time in two months. As seen in Chart 1, the repo rate now stands at 6.5 per cent. 

The rate hike came against the backdrop of the retail inflation rate rising to 5 per cent in June with core inflation rising to a high of 6.35 per cent (Chart 2). 

In its review, the RBI has also upped its inflation forecasts, albeit marginally, to 4.8 per cent in the second half of FY19, rising to 5 per cent in the first quarter of 2019-20 (Chart 3).

While food inflation has slowed of late (Chart 2), the RBI expects the recent hikes in minimum support prices (MSPs) announced by the government (Chart 4) to have a direct impact on inflation.

It noted that while crude oil prices have moderated slightly, they continue to remain at elevated levels, as seen in Chart 5.

Further, it pointed out that the rise in household inflation expectations, as seen in Chart 6, could influence inflation outcomes in the coming months.

It also cautioned that any fiscal slippage at the central and state levels (Chart 7) could crowd out private investment and impact the inflation outlook. 

On the growth front, while the RBI’s industrial output surveys suggest a moderation in manufacturing activity (Chart 8), it has retained its GDP growth projection at 7.4 per cent for 2018-19. 

It expects GDP to grow at 7.5-7.6 per cent in the first half of FY19, and slightly lower at 7.3-7.4 per cent in the second half. For the first quarter of FY20, it has projected GDP growth at 7.5 per cent.

StatsGuru is a weekly feature. Every Monday, Business Standard guides you through the numbers you need to know to make sense of the headlines.