Rising tomato prices, farm waiver give Team Patel a worry on inflation, fiscs

NEW DELHI: Even as some of the upside risks to inflation have either reduced or not materialised, RBI’s Monetary Policy Committee (MPC) headed by Governor Urjit Patel in third bimonthly policy review said it would keep monitoring the inflation trajectory to “ascertain if the recent soft readings are transient or if a more durable disinflation is under way.”

In its policy statement released Wednesday afternoon, MPC said there are visible signs of the usual seasonal spike in prices, even if with a delay, especially in respect of tomatoes, onions and milk.

MUST READ:
RBI bites the bullet, cuts repo rate by 25 basis points to 6%
RBI cuts repo rate by 25 bps, these 12 stocks will be sureshot winners

The central bank noted that administered prices of LPG and kerosene are set to rise with the calibrated reduction in subsidy.

Besides, the implementation of farm loan waivers by states may result in possible fiscal slippages and that can undermine the quality of public spending, entailing inflationary spillovers, the apex bank said.

“Moreover, the timing of the states’ implementation of salary and allowances under the seventh Pay Commission award is critical. It is not factored into the baseline projection in view of lack of information on their plans. If states choose to implement salary and allowance increases similar to the Centre this financial year, the headline inflation could rise by an additional estimated 100 basis points above the baseline over 18-24 months,” RBI said.

The central government’s fiscal deficit touched 81 per cent of the full-year target in the first quarter (April to June) itself. Cumulative fiscal deficit reached 2.6 per cent of GDP, data showed.

Foreign brokerage UBS in a note said while reforms such as GST bode well for India’s sovereign rating, the risk of a worsening consolidated (centre and state combined) fiscal position may act as a deterrent.

The government on Tuesday hiked subsidised cooking gas (LPG) prices by over Rs 2 per cylinder. It has decided to keep raising rates every month to eliminate all subsidies by the end of this financial year.

The MPC on Wednesday took note of the fact that a normal monsoon coupled with effective supply management measures may keep food inflation in check. It believes if the moderation of price increases in CPI (excluding food and fuel) continues, it will contain upside pressure on headline inflation. The outlook for international commodity prices, too, is fairly stable at the current juncture, RBI noted.