Consumers can expect prices of goods and services to firm up after Goods and Services Tax is rolled out.
Those who have rented accommodation can expect hike in rentals following the implementation of Seventh Central Pay Commission (CPC) recommendations, which has increased rent allowance by 1% to 1.5%.
Flagging concerns over price rise, the Reserve Bank of India on Thursday cautioned that the inflation rate is estimate to firm up to 4.5% during first half of the financial year 2017-18 and rise further to 5% in the second half, due to a host of factors including the impact of Goods and Services Tax are rolled out.
While keeping the policy mending rate--repo--unchanged at 6.25%, the RBI said the retail or consumer price inflation (CPI) is set to undershoot the target of 5% for January-March 2017, in view of the less than 4% reading in January and February.
“For 2017-18, inflation is projected to average 4.5% in the first half of the year and 5% in the second half,” the RBI said in its policy statement.
After moderating continuously over the last six months to a historic low of 3.17% in January, CPI firmed up to 3.7% in February.
Highlighting the “upside risks” to the inflation projection, RBI said: “The main one stems from the uncertainty surrounding the outcome of the south west monsoon in view of the rising probability of an El Niño event around July-August, and its implications for food inflation.”
Proactive supply management will play a critical role in staving off pressures on headline inflation, the central bank said.
“A prominent risk could emanate from managing the implementation of the allowances recommended by the 7th CPC. In case the increase in house rent allowance as recommended by the 7th CPC is awarded, it will push up the baseline trajectory by an estimated 100-150 basis points over a period of 12-18 months,” RBI warned.
“Another upside risk arises from the one-off effects of the GST,” it said.
The RBI was also critical of the government’s fiscal deficit, which is “high by international comparison” and poses yet another risk for the path of inflation. The risk is likely to be exacerbated by farm loan waivers, RBI added.
Recent global developments may also raise prices of commodities. “Moreover, geopolitical risks may induce global financial market volatility with attendant spillovers.”
However, RBI pointed out international crude prices has been easing recently and their pass-through to domestic prices of petroleum products should alleviate pressure on headline inflation.
Also, stepped-up procurement operations in the wake of the record production of food grains will rebuild buffer stocks and ease the pressure on food prices.