The Reserve Bank of India (RBI) on Friday revised upwards its retail inflation forecast to 5.7 per cent for the current financial year 2022-23, as compared with the 4.5 per cent projected earlier. RBI Governor Shaktikanta Das said the central bank has upped its CPI inflation projections as “heightened geopolitical tensions since end-February have upended the earlier narrative and considerably clouded the inflation outlook for the year”.
Presenting the Monetary Policy Committee‘s first bi-monthly monetary policy statement for FY23, Das said feed cost pressures could continue due to global supply shortages, which could also have a spillover impact on poultry, milk, and dairy product prices.
On food prices, he said a likely record rabi harvest will help keep domestic prices of cereals and pulses in check. “Global factors such as the loss of wheat supply from the Black Sea region and the unprecedented high international prices of wheat could, however, put a floor under domestic wheat prices.”
Das added that edible oil price pressures are likely to remain elevated in the near term due to export restrictions by key producers as well as loss of supply from the Black Sea region.
On non-food items, Das said the spike in international crude oil prices since February-end poses a substantial upside risk to inflation through both direct and indirect effects. “Sharp increase in domestic pump prices could trigger broad-based second-round price pressures.”
He added that a combination of high international commodity prices and elevated logistic disruptions could aggravate input costs across the agriculture, manufacturing, and services sectors. “Their pass-through to retail prices, therefore, warrants continuous monitoring and pro-active supply management.”
Das stated, “Taking into account these factors and on the assumption of a normal monsoon in 2022 and average crude oil price (Indian basket) of US $ 100 per barrel, inflation is now projected at 5.7 per cent in 2022-23, with Q1 at 6.3 per cent; Q2 at 5.8 per cent; Q3 at 5.4 per cent; and Q4 at 5.1 per cent.”
He said supply-side measures may alleviate food price pressures and also mitigate cost-push pressures across manufacturing and services.
“On our part, let me assure all stakeholders that as in the past, the Reserve Bank will use all its policy levers to preserve macroeconomic stability and enhance the resilience of our economy,” Das added.
The RBI’s Monetary Policy Committee (MPC) in its policy announcement on Friday maintained status quo on the repo rate to keep it at 4 per cent. It also maintained ‘accommodative’ stance, with focus on the withdrawal of this stance if inflation remains out of comfort zone.
The Reserve Bank of India (RBI) is mandated to keep inflation within the range of 2-6 per cent, while the CPI-based inflation rate in February stood at 6.07 per cent. The rate in January was 6.01 per cent.
India Ratings Principal Economist Sunil Kumar Sinha said, “As expected, the RBI has revised its GDP forecast downward to 7.2 per cent (Ind-Ra forecast: 7.0-7.2 per cent) and retrial inflation forecast upward to 5.7 per cent (Ind-Ra forecast 5.8-6.2 per cent) for FY23. Clearly, worsening of the geopolitical situation arising Russia Ukraine conflict and accompanying sanctions on Russia has been impacting the entire world, including India.”
He added that under the current situation, where geopolitical situation and the global commodity prices are in a flus, “Ind-Ra believes the RBI has done the right thing to stay put on the policy rate and continue with the accommodative policy stance, but Ind-Ra also feel that there is a case of 50 bps increase in the policy rates in FY23 because even if the Russia-Ukraine conflict ends, the global commodity prices are unlikely to revert to the pre-conflict level plus the supply-side disruption will take time to ease”.
In the previous policy announcement in early February, the RBI had projected the CPI inflation for 2022-23 at 4.5 per cent, with the first quarter at 4.9 per cent; second quarter at five per cent; third quarter at 4 per cent; and fourth quarter at 4.2 per cent, “with risks broadly balanced”.
For the financial year 2021-22, the central bank had projected inflation at 5.3 per cent, with the March 2022 quarter at 5.7 per cent on account of unfavourable base effects that ease subsequently.
Lakshmi Iyer, chief investment officer (debt) and head (products) at Kotak Mahindra Asset Management Company, has said the RBI MPC meets at a time when outbreak of war has seen a spike in most commodities pack. “Oil is on a boil, gold continues to sizzle, inflation is way too nimble. The growth-inflation debate is likely to hog center stage yet again in the upcoming policy meet.”
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