RBI points to 7 risks to inflation outlook

RBI points to 7 risks to inflation outlook
News

The Reserve Bank of India (RBI) has kept the repo rate unchanged

Important Facts:

  1. Repo rate, Reverse repo rate, marginal standing facility (MSF) rate and the bank rate have been kept unchanged

BASICS:

    • Repo rate: It is the rate at which the central bank of a country (Reserve Bank of India in case of India) lends money to commercial banks in the event of any shortfall of funds
    • Reverse repo rate: It is the rate at which the central bank of a country (Reserve Bank of India in case of India) borrows money from commercial banks within the country
    • Marginal standing facility (MSF) rate: It is the rate at which the banks are able to borrow overnight funds from RBI against the approved government securities.
    • Bank rate: It is the rate charged by the central bank for lending funds to commercial banks
  1. RBI has also retained its stance for the monetary policy at calibrated tightening in accordance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4% (+/-2%) while supporting growth
  2. The RBI note highlighted that the share of gross NPAs in total advances of banks, both in the public and private sector, which had peaked in March 2018, has declined since then. The annualised sleepage ratio (percentage of fresh NPAs as percentage of standard NPAs) has also shown a decline in the last two quarters.
  3. RBI has projected inflation in the second half of the current fiscal year at 2.7-3.2%, citing normal monsoon and moderate food prices. In its previous policy review in October, RBI had projected the retail inflation to be around 3.9-4.5% in the October-March period of 2018-19.

7 Risks to Inflation Outlook

Thought the inflation projections have been downgraded significantly, the RBI has pointed out 7 risks to inflation outlook:

  1. Prices of several food items are at unusually low levels and there is a risk of sudden reversal of prices, especially of volatile perishable items
  2. uncertainty continues about the exact impact of higher minimum support prices
  3. Crude oil prices still remain uncertain due to global demand conditions, geopolitical tensions and decision of OPEC which could adversely impact supplies
  4. Volatile nature of global financial markets
  5. Though households’ near-term inflation expectations have moderated in the latest round of RBI survey, for the next year it remains elevated
  6. Fiscal slippages which can accentuate market volatility and crowd out private investment
  7. HRA revision by state governments can increase headline inflation

Additional Information:

 

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