Statsguru: MPC holds interest rates; inflation expectations also firm up

The decision to maintain the status quo was made against the backdrop of the retail inflation rate, measured by CPI, rising for the sixth consecutive month in December

In a recent meeting, the monetary policy committee (MPC) chose to keep the repo rate unchanged at 6 per cent (Chart 1). The decision to maintain the status quo was made against the backdrop of the retail inflation rate, measured by the consumer price index (CPI), rising for the sixth consecutive month in December (Chart 2).
 
The consumer food price index has surged of late, rising from 1.3 per cent in September to 5 per cent in December. But, even the core inflation rate, which excludes food and fuel, has edged upwards, after the implementation of higher house rent allowances (HRA) for government employees, under the 7th Pay Commission.

 
Surveys by Reserve Bank of India show households’ inflation expectations will remain elevated for the next three months. They will remain high for the one-year ahead period also. But, expectations for this period have moderated slightly (Chart 3).
 

The outlook for inflation remains clouded due to several factors, said the MPC. For one, the staggered impact of the increased HRA by various state governments could push it up further. Second, higher crude oil prices, as shown in Chart 4, will impact inflation, besides having implications for the current account and fiscal deficit. Third, deviation from the fiscal road map would impinge upon the inflation outlook (Chart 5). It has already spooked the bond market (Chart 6). Fourth, the Budget has proposed revised guidelines for arriving at the minimum support prices (MSPs) for kharif crops. While the government has clarified that this will be based on A2+FL cost, it is difficult to ascertain the overall impact on inflation (Chart 7). And finally, the Budget has also proposed an increase in the Customs duty on a number of items, which would exert upward pressure on inflation.

 
But, there are mitigating factors as well. Capacity utilisation could remain subdued, oil prices could soften, and rural real wage growth could remain moderate. 
StatsGuru is a weekly feature. Every Monday, Business Standard guides you through the numbers you need to know to make sense of the headlines. Compiled by BS Research Bureau