Inflation based on consumer price index (CPI) is likely to be around 5-5.5 per cent this fiscal and rise in minimum support price (MSP) will have positive implications for the economy, Japanese brokerage firm Nomura has said.
The prudent increase in MSPs despite weak monsoons is driven by lower cost of production, weak food prices globally, ample buffer stock with the government and to keep overall inflationary impulses in check, it added.
"We estimate that every 1 per cent MSP increase adds around 15 basis points to headline CPI inflation. Since the MSP increases are broadly consistent with our expectations (3-4 per cent), we maintain our CPI inflation forecast of 5.0-5.5 per cent in FY16," Nomura said in a research note, adding that "we also do not expect any adverse fiscal impact".
The government yesterday hiked the MSP for pulses by up to Rs 275 per quintal for this year to boost domestic output and check price rise, while making a modest increase of Rs 50 in paddy MSP to Rs 1,410 per quintal.
The report said the modest increase in MSPs has positive macro-economic implications.
Firstly, the moderate hike signals the government's commitment to prudence and longer-term macro stability rather than short-term populist measures.
"The government's decision to continue on the prudent path of lower MSPs, adopted two years back, implies that food inflation in India should remain in check, although it also indicates that rural demand will remain weak," it added.
Moreover, the government's food subsidy bill tends to rise in tandem with the MSP increase. Hence, low MSPs imply no adverse fiscal impact.
On monetary policy, it said that the Reserve Bank is expected to keep rates on hold till 2016-end.
"We continue to expect the RBI to keep rates on hold until 2016-end, as it turns its focus towards moderating inflation expectations and lowering inflation further to 4 per cent in the medium-term," the report said.
In the policy review meet on June 2, RBI cut interest rate by 0.25 per cent for the third time this year to spur investment and growth but hinted that there may not be any more cuts in the near-term.
