Monetary Policy Review: RBI yet to figure out impact of MSP for crops on inflation

 BusinessToday.in   New Delhi     Last Updated: February 8, 2018  | 11:46 IST
Monetary Policy Review: RBI yet to figure out impact of MSP for crops on inflation

The RBI in its bi-monthly monetary policy report on Wednesday said the Monetary Policy Committee (MPC) has estimated that inflation would remain around 5.1-5.6% in April to September, and then 4.5-4.6% in October to March. RBI Governor Urijit Patel said the overall inflation would remain around 4.5 per cent for the FY 2018-19, though the overall impact of the recent MSP announcement on inflation was yet to be ascertained. Finance Minister Arun Jaitley, in his Budget speech on February 2, had said the government would provide 50 per cent MSP (Minimum Support Price) over the cost of production on kharif crops for farmers.

"The Union Budget 2018-19 has proposed revised guidelines for arriving at the MSPs for kharif crops, although the exact magnitude of its impact on inflation can't be fully assessed at this stage," the RBI said in a statement.

The MPC said its current monetary decision is in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4 per cent within a band of +/- 2 per cent, while supporting growth.

In a report released on Monday, the State Bank of India had also said that there will be "minimal" impact on inflation from the government's decision to fix support prices for the upcoming Kharif crops at least 50 per cent higher than the cost of production. "Whether such a price fixation will impact inflation or not. We believe the impact on inflation will be minimal," said the SBI Ecowrap report.

However, analysts suggest the higher MSP on farm commodities would give rise to food inflation during the procurement season starting June, which could force the RBI to reconsider its current stance on the monetary policy. The MPC has said there are uncertain several factors that may push up the overall inflation outlook in this fiscal like HRA increases by state governments, global growth pickup, higher MSP, increase in custom duty, and fiscal slippage as indicated in the Union Budget 2018.

"First, the staggered impact of HRA increases by state governments may push up headline inflation. Second, a pickup in global growth may exert pressure on crude oil and commodity prices with implications for domestic inflation. Third, Budget has proposed revised MSP for kharif crops, although its exact impact on inflation can't be fully assessed at this stage. Fourth, the Budget has also proposed an increase in customs duty on many items. Fifth, fiscal slippage could impinge on the inflation outlook. Sixth, the confluence of domestic fiscal developments and normalisation of monetary policy by major economies could adversely impact financing conditions and undermine the confidence of external investors," the statement said.

Fulfilling Prime Minister Narendra Modi's 2014 poll promise, FM Jaitley during his Budget speech had announced to "keep MSP for the all unannounced crops of kharif at least at one and half times of their production cost", which, he said, would prove to be a major step towards doubling the farmers' income by 2022 when India celebrates its 75th year of independence.

Also read: RBI lowers FY18 economic growth forecast to 6.6%

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