‘RBI shouldn’t hike rate for fear of Budget stoking inflation’

New Delhi: The RBI should refrain from raising interest rates owing to concerns about inflation being stoked by the pro-farm sector proposals of the budget 2018-19, industry chamber Assocham said on Sunday ahead of the central bank’s final bi-monthly monetary policy review of the fiscal slated for the next week.

Presenting the Union Budget for the next fiscal, Finance Minister Arun Jaitley on Thursday announced that the Minimum Support Price (MSP) for notified kharif crops will be 1.5 times the input cost, and also stepped up total budgetary allocation for the sector for next fiscal by about 5 per cent.

“The Reserve Bank of India (RBI) should not over-react to the high yield pressures of the bond market, along with the government promising a substantial revision in the MSP for farmers, and refrain from going in for any hike in the benchmark policy lending rates when the Monetary Policy Committee meets on February 7,” Assocham said in a press release.

Jaitley also made a significant announcement of fiscal slippage with implications for pushing inflation, revising upwards the government’s fiscal deficit target for 2017-18 to 3.5 per cent of the GDP, or the equivalent of Rs 5.95 lakh crore. The higher target came in place of the 3.2 per cent — or Rs 5.46 lakh crore — for the current fiscal announced earlier.

“Yes, some of the macro indicators, including pegging of higher fiscal deficit of 3.3 per cent for FY’ 2019 and 3.5 per cent of the GDP for the current fiscal, look difficult, but reaction of the bond market to the budget-related would ease out soon,” the Associated Chambers of Commerce and Industry of India (Assocham) said.

With the RBI maintaining status quo on its key lending rate at 6 per cent over three previous policy reviews, citing concerns on the rising trajectory of inflation, Assocham said the concerns over MSP leading to increase in retail inflation were exaggerated for various reasons.

“In the first place, effectively, there is no MSP for the vegetables at the ground level. As for the Operation Green for onion and potato, the entire institutional mechanism would have to be worked out by the NITI Aayog along with the states,” the industry body said.

“Same is the situation with regard to the MSP for several other agri commodities where the NITI Aayog and the states would bear in mind the farmers’ interest, while the institutional mechanism would surely strike a balance between remuneration to the growers as also the impact on the retail prices,” the statement added.

With the Bombay Stock Exchange plummeting 840 points the day after the budget announcement, Assocham described it as “a healthy correction which was overdue” in the stock markets.

“It is time the RBI joined the initiative by ensuring that the growth which seems visible, should be encouraged by at least not revising the interest rates upward, if at all the present macro situation does not favour any reduction,” the statement added.

The continuing rise in food and fuel prices pushed India’s annual retail inflation rate over the five per cent mark in December, to 5.21 per cent, from 4.88 per cent in November.