Price rise driven by HRA, says Patel on RBI status quo on rate

The Reserve Bank did not go in for a hike in key rates today, despite expecting a surge in inflation going forward, as the price rise is being driven by higher house rent allowance (HRA) to government employees, Governor Urjit Patel said.
Nearly 0.35 per cent of current inflation is due to the HRA hikes as per the 7th pay panel recommendations, he said.
Even if one were to look at the future, the inflation excluding the HRA will be 4.5 per cent in next fiscal, he added.
RBI kept the key interest rate unchanged at 6 per cent for the third time in a row saying that higher government spending would accelerate inflation, and warned of risks from wider fiscal deficit.

"Taking all that into account, we felt that at this stage, without more data coming in, it was not necessary to change the repo rate or the stance," Patel told reporters after the 6th bi-monthly review of the monetary policy in the current fiscal, ending March 31.
He added that in the 2018-19 fiscal, there may be a few months or quarters when the inflation will be higher than the 4.5 per cent expectation.

RBI said it expects the headline inflation to be 5.1-5.6 per cent in the first half of next fiscal and cool down to 4.5-4.6 cent in the second half.

It also upped the inflation forecast for the fourth quarter of the current fiscal to 5.1 per cent from the earlier expectation of 4.3-4.7 per cent inflation in the second half of the fiscal.
"Our projections are indicating that inflation has risen a little this quarter and will be at 4.5 per cent in FY2018- 19. Therefore, there was no need for a change in this monetary policy. As the data flows over the next 2-3-4 months, accordingly we will take a call on what to be done," Patel said.
The resolution of the Monetary Policy Committee (MPC) also enlisted risks to inflation, which included fiscal slippages, spillover of HRA hikes as more states adopt the 7th pay panel suggestions, hike in custom duties on consumer durable items and rally in crude prices.

Patel, however, refrained from quantifying the impact of the surge in Minimum Support Prices (MSP) on foodgrains proposed in the budget on the price situation, saying the RBI is yet to assess the exact impact.
On the fiscal stance of the government, he made it clear that if there are significant deviations from the path, the RBI's task of meeting the 4 per cent inflation target will be "challenging".
He also acknowledged that the fiscal deficit number has been on a downward trajectory since 2014, when the Modi government came to power.
The RBI had last cut its key rates in August 2017 and continues to be on the neutral stance for the policy since adopting it in February last year.

Patel said the sagging investment-to-GDP ratio is slated to rise and pointed to jump in credit growth and higher capacity utilisations in the industry as a discernible sign for that.
He exuded confidence that credit growth to the industry will improve further on the bank recapitalisation and resolution of dud assets under the Insolvency and Bankruptcy Code.
For the rise in bond yields over the past few months, Patel blamed the yields in the global markets including the US, where they have hardened by up to 0.50 per cent and also domestic factors including the heating up of inflation and also fiscal slippage.

Patel said export growth is also likely to improve further in the next few months as the conditions in the global economy improve.