The Monetary Policy Committee (MPC) expects a boost in rural demand as a strong monsoon and a hike in the minimum support prices (MSP), will increase farmers’ income.
The six-member committee, headed by Reserve Bank of India (RBI) governor Urjit Patel, decided to hike the repo rate by 25 basis points to 6.50 percent, in its second bi-monthly meeting of 2018-19.
According to the third bi-monthly monetary policy statement, "Several high-frequency indicators of services activity increased at a faster pace in May-June. Tractor and two-wheeler sales growth accelerated significantly, suggesting strong rural demand."
Meanwhile, inflation was projected at 4.6 percent in H1 and 4.7 percent in H2 excluding the HRA impact for central government employees, but the actual outcome has been below projection.
The hike in MSP by the central government, which is larger than the average seen in the previous years, is expected to impact food inflation directly, and partially impact headline inflation. The exact impact cannot be said as the government’s procurement operations will decide the projections.
RBI said in its policy statement that overall performance of the monsoon has been encouraging so far and will positively impact food inflation in the medium-term. According to the statement, the cumulative rainfall up to July 31, 2018, was 6 percent below the long-average period.
However, the regional distribution of monsoon needs to be monitored for key components of the Consumer Price Index (CPI), such as paddy.
Excluding the HRA impact, RBI is projecting CPI inflation at 4.4 percent in the second quarter, 4.7 to 4.8 percent in the second half of the year and 5 percent in Q1 FY20.