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Context:
The RBI has stressed the need for vigilance on price stability amid inflationary risks
What has happened?
- RBI has held the policy repo rate at 6% citing risks of inflation.
- In December, The RBI had made a projection for inflation in the range of 4.3-4.7% in the six months through March 2018.
- With pump prices of petrol and diesel having risen sharply in January, the RBI has now been forced to raise its estimate for retail price gains in the fourth quarter to 5.1%.
Inflation scenario:
The inflation scenario has been getting more worrying. These include the staggered impact of:
- HRA increases by various State governments that may induce second order effects on prices;
- the pick-up in global growth, a factor the RBI also cites as a positive for the economy,
- push up crude oil and commodity prices worldwide;
- the Budget’s proposed changes to the minimum support price norms for crops as well as the proposals to increase customs duty on a range of goods; and
- the fiscal slippage, which could not only fan inflation but also risks increasing borrowing costs
