RBI Governor Raghuram Rajan kept the key policy rate unchanged citing higher upside risks to ‘inflation trajectory’ but said the central bank will remain accommodative provided data is supportive.
Accordingly, Rajan retained the short-term lending rate at 6.5 and the cash reserve requirement of banks at 4 per cent.
“The inflation surprise in the April reading makes the future trajectory of inflation somewhat more uncertain… rising crude prices and implementation of the seventh pay commission awards being the key risks,” Rajan said in the second bimonthly monetary policy for the current fiscal.
“Incoming data since the April policy announcement show a sharper-than-anticipated upsurge in inflationary pressures emanating from a number of food items (beyond seasonal effects), as well as a reversal in commodity prices,” Said the RBI governor explaining the rationale for keeping the rates unchanged
RBI retained the January 2017 retail inflation target at 5 per cent, though with an upward bias, amid a sharper-than-anticipated upsurge in inflationary pressures due to food items and firming oil prices.
Consumer Price Index (CPI) based retail inflation excluding food and fuel edged up in April. Services inflation also remained elevated on account of house rents, water charges, tuition fees and taxi/auto fares.
However, since growth in rural wages and corporate staff costs have been modest, cost-push factors may be subdued for the time being, RBI Governor Raghuram Rajan said in the second bi-monthly Monetary Policy Statement, 2016-17.
“The inflation surprise in the April reading makes the future trajectory of inflation somewhat more uncertain,” the statement said as RBI retained the inflation projections given in the April policy statement “though with an upside bias”.
In April, RBI had projected retail inflation to be around 5 per cent.
Rajan further said the expectations of a normal monsoon and a reasonable spatial and temporal distribution of rainfall, along with various supply management measures and introduction of the electronic national agriculture market (e-NAM) trading portal, “should moderate unanticipated flares of food inflation”.
“A strong monsoon, continued astute food management, as well as steady expansion in supply capacity, especially in services, could help offset these upward pressures,” RBI said.
In addition, capacity utilisation indicators suggest that the available headroom in industry could keep output prices subdued even as demand picks up, the statement said.
“Nonetheless, there are upside risks firming international commodity prices, particularly of crude oil. The implementation of the 7th Central Pay Commission awards which will have to be factored into projections as soon as clarity on implementation emerges…,” the Governor said.
The upturn in inflation expectations of households and of corporate, and the stickiness in inflation excluding food and fuel are also upside risks to inflation.
(With PTI inputs)