Favourable inflation base effect to disappear: Arun Singh

Arun Singh

In line with expectations, RBI maintained status quo on policy rate while withdrawing the 100% incremental cash reserve ratio (CRR) requirement which was imposed recently, in view of the risks to inflation that remain tilted to the upside. Even as retail inflation has eased driven by a sharper than anticipated moderation in the prices of vegetables and strong favourable base effect, it masks some upturn in the prices of several items; prices of wheat, gram and sugar have been firming up.

The downward inflexibility in inflation excluding food and fuel could pose risks to inflation. Moreover, the favourable base effects are likely to dissipate and turn somewhat unfavourable in the near term. Interest rate differential between India and US is already seen narrowing and the MPC has preferred to wait-and-watch before easing rates ahead of the US rate hike looming in mid-December.

The transmission of the earlier rate cuts into bank lending rates has not been a tad impressive, which has also compelled the RBI to maintain a status quo. On the other side, in spite of excess liquidity in the system, bank credit growth has been moderating due to increasing risk aversion among banks given rising NPAs.