RBI Policy: MSP hike to push up CPI forecast by only 10-12 bps, says Deputy Governor Patra

The Union Cabinet, on June 7, announced higher Minimum Support Prices for kharif crops for 2023-24.

The hike in Minimum Support Price (MSP) approved by the Union Cabinet will only push up the Reserve Bank of India's (RBI) inflation forecast by a marginal 10-12 basis points, a deputy governor at the central bank said on June 8.

"We got the MSP data yesterday. And we find that the average increase across all crops is about 7.5-8 percent. So over and above our projections, this will impact to the extent of 10-12 basis points," Michael Patra said on at the post-policy media briefing.

One basis point is one-hundredth of a percentage point.

On June 7, the Union Cabinet announced the MSPs for 14 kharif crops for the 2023-24 marketing season. According to economists, the weighted average increase in the MSPs was seven percent compared to the 2022-23 prices - the most in five years. In comparison, the MSPs were raised by 5.8 percent in 2022-23.

According to Nomura economists Aurodeep Nandi and Sonal Varma, the increase in MSP growth is due to "the sharp rise in input costs rather than being a populist measure".

Soumya Kanti Ghosh, State Bank of India's group chief economic adviser, noted on June 7 that the impact of higher MSPs on inflation depends on the government's procurement strategy and prevailing market prices.

"The impact on inflation will be muted as the eNAM (National Agriculture Market) prices are higher than the increased MSP for many of the crops and
procurement of crops other than rice and wheat is also limited," Ghosh said.

As per the RBI's latest forecasts, headline retail inflation is seen averaging 5.1 percent in 2023-24 - 10 basis points lower than what the central bank had predicted in April.

The cut in the inflation forecast comes after Consumer Price Index (CPI) inflation crashed to an 18-month low of 4.70 percent in April. Economists expect it to have fallen further in May, data for which will be released on June 12.

Responding to the question on the impact of the MSP hike on inflation, Governor Shaktikanta Das said a portion of the price hike was "already built into our projections" as they took into account the hikes announced in previous years.

"So therefore, it will be another…as DG (Deputy Governor Patra) says, another 10-12 basis points, that is what the quick calculations that we have done overnight show," Das added.