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RBI sees inflation rising in the near-term

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Mumbai, Dec 5 (IANS) Upsurge in food prices is expected to keep retail inflation rate rising in the near-term, the Reserve Bank of India’s Monetary Policy Committee said on Thursday.

However, the MPC noted that inflation is likely to moderate below target by Q2 of 2020-21.

The RBI’s inflation expectations assume significance as the apex bank on Thursday decided to take a ‘temporary pause’ in reducing key lending rates to keep retail prices in check.

"In the judgement of the MPC, inflation is rising in the near-term, but it is likely to moderate below target by Q2:2020-21," the Fifth Bi-monthly Monetary Policy Statement, 2019-20 said.

"It is, therefore, prudent to carefully monitor incoming data to gain clarity on the inflation outlook."

According to the MPC, actual inflation outcome for Q2 evolved broadly in line with projections — averaging 3.5 per cent, but the inflation print for October was much higher than expected.

In November, macro-economic data showed that a substantial rise in food prices had lifted India’s October retail inflation to 4.62 per cent from 3.99 per cent in September.

The macro-data indicated that retail inflation level had breached the medium-term target for Consumer Price Index (CPI) inflation of 4 per cent. The target is set within a band of +/- 2 per cent.

"Going forward, the inflation outlook is likely to be influenced by several factors… the upsurge in prices of vegetables is likely to continue in immediate months; however, a pick-up in arrivals from the late kharif season along with measures taken by the Government to augment supply through imports should help soften vegetables prices by early February 2020," the statement said.

It further noted that incipient price pressures seen in other food items such as milk, pulses, and sugar are likely to be sustained, with implications for the trajectory of food inflation.

"Taking into consideration these factors, the CPI inflation projection is revised upwards to 5.1-4.7 per cent for H2 (second half) of 2019-20 and 4.0-3.8 per cent for H1 of 2020-21, with risks broadly balanced," the statement said.

On Thursday, the RBI in a surprise move took a ‘temporary pause’ in reducing key lending rates to keep the retail inflation in check.

Accordingly, the RBI’s monetary policy committee (MPC) in its fifth review of the current fiscal kept the repo, or short term lending rate for commercial banks at 5.15 per cent.

Consequently, the reverse repo rate was maintained at 4.90 per cent, and the marginal standing facility (MSF) rate and the bank rate remained at 5.40 per cent.

The Reserve Bank had reduced key lending rates during the last five policy reviews to reverse the current consumption slowdown that has plagued the country’s economy, thus surprising India Inc and many economists.

However, the Reserve Bank’s MPC continued its accommodative stance.