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As was widely expected, the Reserve Bank of India’s rate setting monetary policy committee (MPC) on Wednesday decided to keep the policy repo rate unchanged at 6 per cent. The status quo on the rate comes as the inflation outlook, in the words of MPC, is clouded by several uncertainties on the upside, including staggered impact of HRA increased by various State governments; pick-up in global growth exerting further pressure on crude oil and commodity prices, with implications for domestic inflation; proposed increase in minimum support price for kharif crops; fiscal slippage; and proposed increase in Customs duty on a number of items. The six-member MPC said there is, therefore, need for vigilance around the evolving inflation scenario in the coming months. RBI Governor Urjit Patel addressed queries from the media on the reasons for keeping the rate unchanged and continuing with a neutral policy stance.

Excerpts:

The weighted average call rate is below policy rate, your stance is neutral, rates are unchanged, but the bond yields are rising very sharply. What is the reason for this?

I think that we need to keep in mind that there is a confluence of factors and developments, both external and domestic, which forms the backdrop to this development.

The firming of yields abroad because of the changes in the stance of systemic central banks, especially the US Fed, and other fiscal developments in the US have been significant. So, over the last six weeks, the US 10-year (Treasury) yields have hardened by 40-50 basis points. That is a fair bit of movement.

Secondly, over the last six months, domestic inflation has increased. In part, of course, this has been due to the firming of food prices. Coming to domestic factors, because of the uptick in economic growth, there are now competing demands for financial capital, which puts upward pressure on all returns.

Then, we also have the case that on the fiscal side we have news of fiscal slippages at three levels in recent times — fiscal slippage this year, fiscal slippage next year compared to what the market expected and what the target was, and then a postponement of the medium-term adjustment even further.

So, if you look at all these factors, I think, that it makes it pretty clear which way the bond yields are likely to move.

Why is the investment-GDP ratio still subdued?

I think, that we should expect the investment-GDP ratio to improve and, I think, there are the first discernible signs of that when existing capacity utilisation reaches a certain level.

And, secondly, the reason I say that there are incipient signs is that the credit offtake after a long time is now in double-digits, albeit in low double-digits. So, I think, the movement in both these (capacity utilisation and improved credit offtake) are likely to result in an investment-GDP ratio that may go up.

The other thing we need to keep in mind is that the taxation on capital in India is from several sources — corporate tax rate, dividend distribution tax rate, for dividend income above ₹10 lakh you have marginal tax rate, securities transaction tax and capital gains tax.

So, there are five taxes on capital and you know that would obviously also have an impact on investment and savings decisions.

What would warrant a shift in the monetary policy stance?

We look at inflation projections longer than what is happening in this quarter. Half of this quarter is already gone and that (inflation) rate includes 35 basis points of HRA.

If you look at our 2018-19 forecast, and if you make adjustments for HRA, going forward the inflation rates are still around 4.5 per cent. In some quarters, some months, they may be a little high.

Taking all that into account, we felt that at this stage without more data coming in, it was not necessary to change the repo rate or the policy stance.

What will be the impact of postponement in meeting the fiscal deficit target?

We also need to be mindful that even as the fiscal deficit has stayed above 3 per cent, inflation has come down to some extent because the fiscal stance starting from 2014 has actually been on a downward trajectory.

Secondly, the monetary policy itself has become much more flexible in terms of responding to inflation risks. So, it is not necessary that a 3 per cent target should be achievable by the time the report (Report of the Expert Committee to Revise and Strengthen the Monetary Policy Framework) said (the report was written in 2014).

However, having a fiscal stance that is conducive to achieving the 4 per cent (inflation) target is important and significant deviation from this would make matters more challenging, going forward.

What will be the impact of increase in minimum support price on inflation?

I think, we are still waiting for some of the specifics on that in terms of costing it. And, in the coming weeks, as more information comes through on exactly which crops are going to be supported to what extent, we would have a better idea on the impact.

We have said there could be an impact but we have not said how much or whether it is going to be more or less….So, at the moment, there is not enough information for us to figure out exactly what the costing would be.

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