Inflation may force RBI to stop on rate cuts: IMF

wholesale inflation

New Delhi, Dec 24 : IMF has cautioned that if inflationary pressure continues, there will be limited room for RBI to cut interest rates to support growth.

“On monetary policy, given the sharper-than-expected slowdown and negative output gap (growth below potential), there is room to cut the policy rate further, especially if the economic slowdown continues. However, should inflationary pressures increase (stemming from the recent increase in food inflation and one-off prospective price increases in the auto and telecom sectors or resulting from fiscal pressures), the RBI will have limited room for further cuts”, the Fund said in its 2019 India Article IV Staff Report.

Earlier this month, the six-member Monetary Policy Committee of RBI surprised markets by deciding to hold the repo rate steady at 5.15 per cent, citing high inflation. The MPC, headed by Governor Shaktikanta Das, preferred to wait and watch for the previous rate cuts to trickle through before easing further.

But before that it had already cut 135 bps in rates of interest. “While the current spike in the headline inflation is arguably due to the temporary supply shocks on the food front, the impact is not confined only to a few items. It is important to understand how much would be the impact and for how long,” MPC member Ravindra Dholakia said.

Annual retail inflation increased to 5.54 per cent last month. RBI inflation target is 4 per cent. Retail food prices, that make up nearly half of India’s inflation basket, rose 10.01 per cent in November from a year earlier, against 7.89 per cent in October.

“There exists considerable uncertainty on the food price trajectory, and the quantum of impact of unseasonal rains on kharif output would be known only early next year. The incoming data may also provide greater clarity on the growth outlook,” deputy governor B P Kanungo said.

In the July-September period, India’s growth continued to slide, to a six-year low of 4.5 per cent.

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