Domestic and Global Factors

Policymakers at the Indian central bank expressed concern over the rising inflation, that is driven by both domestic and global factors, and sought vigilance over the outlook for the coming months, the minutes of the latest policy session showed Wednesday. "The MPC notes that the inflation outlook is clouded by several uncertainties on the upside," the minutes of the Reserve Bank of India Monetary Policy Committee meeting on February 6 and 7 showed. "There is... need for vigilance around the evolving inflation scenario in the coming months," the bank added. 

The bank pointed out that the house rent allowance, or HRA, increases by different state governments could push up headline inflation over the baseline in 2018-19, and potentially induce second-round effects. The RBI projected inflation, including the HRA impact, at 5.1 percent for the quarter ending March 31. A pick-up in global growth can also exert further pressure on crude oil and commodity prices with implications for domestic inflation, the bank said. 

Proposed revised guidelines for arriving at the minimum support prices for monsoon crops and a hike in the customs duty of some items can also boost inflation, the RBI minutes said. The bank also warned that the fiscal slippage as indicated in the federal budget could impinge on the inflation outlook and could have broader macro-financial implications, notably on economy-wide costs of borrowing which have already started to rise. 

Finally, the confluence of domestic fiscal developments and normalization of monetary policy by major advanced economies could further adversely impact financing conditions and undermine the confidence of external investors, the bank said. That said, subdued capacity utilization, potential softening in oil prices and moderate rural real wage growth can be the mitigating factors, the bank said. 

Regarding the growth outlook, policymakers said that "the nascent recovery needs to be carefully nurtured and growth put on a sustainably higher path through conducive and stable macro-financial management." In the meeting, the MPC decided in a 5-1 vote to keep the policy repo rate unchanged at 6 percent. Michael Patra was the sole member voting against the move and called for a 25 basis points hike.