RBI MPC meet: FY23 inflation at 5.7% amid global supply challenges

After the bi-monthly meeting of the Monetary Policy Committee (MPC), Reserve Bank Governor Shaktikanta Das raised the inflation projection for the current fiscal to 5.7%, up from the earlier estimation of 4.5% in the face of rising commodity and crude oil prices.

“...on assumption of a normal monsoon during 2022 and average crude oil price, that is the Indian basket, at $100 per barrel, inflation is now projected at 5.7% in 2022-23 with Q1 at 6.3%, Q2 at 5%, Q3 at 5.4% and Q4 at 5.1%,” Das stated during his address post the MPC meet on Friday.

Das pointed out that considering the excessive volatility in global crude oil prices and the extreme uncertainty over the evolving geopolitical tensions, any projection of growth and inflation is fraught with risk, largely contingent upon future oil and commodity price developments. In this context, continuation and deepening of supply-side measures may alleviate food price pressures and also mitigate cost push pressures across manufacturing and services, he further added.

In its last meeting in February, the MPC had projected a moderating path of inflation during financial year 2022-23. However, heightened geopolitical tensions since February have upended the earlier narrative and considerably clouded the inflation outlook for the year, Das mentioned.

While a likely record rabi harvest would help to keep domestic prices of cereals and pulses in check, global factors such as loss of wheat supply from the Black Sea region and the unprecedented hike in international prices of wheat could however put a floor under the domestic prices of wheat, the RBI Governor projected.

“Edible oil price pressures are likely to remain elevated in the near term due to export restrictions by the producers as well as loss of supply from the Black Sea region. Feed cost pressures could continue due to global supply shortages which could also have a spill-over impact on poultry milk and dairy product prices,” he further said.

Meanwhile, the spike in international crude oil prices poses 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, Das warned.

“A combination of high international commodity prices and elevated logistics disruptions could aggravate input costs across agriculture, manufacturing and the services sectors. Their pass-through to retail prices, therefore, warrants continuous monitoring and pro-active supply management. Financial markets are likely to remain volatile on rising risk premium, dislocation in trade and capital flows, and divergent monetary policy responses across central banks,” Das said.

"The inflation trajectory is showing a strong northbound bias. The expectation of softening the core inflation was derived from moderation of food inflation has been dissipated by the volatile crude prices, currency pressures and elevated input cost. The RBI will closely monitor emerging data points," says Rajiv Sabharwal, MD & CEO of Tata Capital.

During its first meeting in the current fiscal, the MPC unanimously decided to keep the repo rate and reverse repo rate unchanged at 4% and 3.35%, respectively, amid rising inflationary pressures. The six-member panel also retained its “accommodative” stance, while focusing on “withdrawal of accommodation” to ensure that inflation remains within the target going forward.

The MPC also revised India's GDP forecast for FY23 downward to 7.2% from the earlier projection of 7.8%. Das said the real GDP growth is expected to rise to 16.2% in Q1 FY23; 6.2% in Q2 FY23; 4.1% in Q3 FY23 and 4% in Q4 FY23.