“The newly announced minimum support prices for Kharif crops mark a steep rise in prices. We estimate that the rise in support prices of cereals and pulses in FY 2019 will be nearly 25%, equivalent to the cumulative increase seen over the last five years. On a CPI-weighted basis, the increase amounts to 90 basis points, and we thus, expect at least 50 bps upside risk to forward-looking inflation estimate. Should the government rely on large-scale procurement of crops to implement these prices, then the fiscal cost could be around 0.3% of GDP, which will likely be shared by the central and state governments.
“As far as monetary policy is concerned, we expect the MPC to take note of the upside risk due to direct impact of higher MSPs, fiscal cost and second round effects. In tandem with further rise in oil prices and rupee depreciation since the June policy this development should cement the case for another hike. We continue to expect that hike to be delivered in the October meeting.” Prasanna ISEC PD