For keeping headline inflation close to 4 per cent on a durable basis, it is important to recognise near and medium-term risks to inflation outlook

Headline CPI inflation has risen sharply in the last two months and there has been a broad-based increase in inflation excluding food and fuel, stated Dr. Urjit R. Patel in Minutes of the Monetary Policy Committee Meeting. Even as the assessment of food prices going forward is generally favourable, some factors have imparted uncertainty to the near-term overall inflation outlook. Firstly, international crude prices have firmed up significantly in the more recent period. Second, global geo-political uncertainty and volatility in financial markets have increased. Third, a combination of farm loan debt waivers by state governments and the implementation of the pay commission award could entail some fiscal slippages and pose a risk to inflation. Notwithstanding some softening in the recent period, inflation expectations show downward rigidity. This is reflected in the high increase in staff cost, particularly in the manufacturing sector.

The loss of momentum in Q1 of 2017-18 has imparted a downside to the overall GVA outlook. The implementation of the GST has rendered prospects for the manufacturing sector uncertain in the short-term. This may further delay the acceleration in investment activity. However, there is a need for more data to assess whether the recent headwinds in overall GDP growth prints are transient or sustained. Prospects of agriculture are favourable, notwithstanding marginally lower estimates of kharif production. The Reserve Bank's industrial outlook survey points to overall business sentiment improving in Q3. The manufacturing PMI remained in expansion mode in August and September. Output of core industries showed a robust growth in August. Several lead indicators of services sector activity - sales of commercial and passenger vehicles, international air passenger traffic, railway freight traffic, and foreign tourist arrivals - gained momentum in August. GVA growth is projected to strengthen in the second half of the year.

Recent structural reforms may have had some impact on growth in the short run. However, they will boost medium- to long-term growth prospects. To improve immediate growth prospects, teething troubles relating to GST need to be addressed expeditiously. Concerted efforts also need to be made to encourage investment activity by removing various constraints. Resolution of stressed balance sheets of banks remains important for supporting a revival in the investment cycle. Finally, government should adjust administered interest rates on savings instruments every quarter as per the formula to help with monetary transmission.

For keeping headline inflation close to 4 per cent on a durable basis, it is important to recognise near and medium-term risks to the inflation outlook. We have to be vigilant on account of uncertainties on the external and fiscal fronts; this calls for a cautious approach. I, therefore, vote for keeping the policy repo rate on hold, while maintaining the stance as neutral.

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