Economy must adjust to recent rate hikes, eye on inflation needed: RBI MPC

The economy faces several uncertainties and upside risks from the continuous rise in oil prices, volatility in emerging economies’ financial markets, uncertainty surrounding the impact of increase in Kharif crop minimum support prices and the risk of fiscal slippage by central or state government(s). According to Viral Acharya, deputy governor of the RBI, Growth has been reasonably buoyant as evidenced by the real economic activity indicators for both the rural economy and the urban counterpart. Our estimates of the output gap suggest it has virtually closed as per the traditional measures; my preferred finance-neutral output gap measure has in fact turned positive due to asset price growth and especially non-food credit growth that is now in excess of the nominal GDP growth rate. He says that it is important, given the RBI’s mandate of flexible inflation-targetting, that the MPC moves forward carefully taking action at appropriate moments allowing the economy to adjust to the two back-to-back rate hikes while being vigilant of any emerging inflationary pressures. The only member of the MPC to vote for a rate hike of 25 bps is Dr Chetan Ghate, who said, What worries me on the pickup in growth is the dismal consumer confidence numbers, with consumer confidence in Q2 FY 18-19 worsening. Ideally, in a growing economy, the durability of growth is better sustained if it is supported by growing consumer confidence.

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