RBI raises inflation forecast for FY23 to 6.7%

The Reserve Bank of India on Wednesday further hiked its inflation projection for the financial year 2022-23 to 6.7% from 5.7% earlier on the back of rising crude oil prices.

"The tense global geopolitical situation and the consequent elevated commodity prices impart considerable uncertainty to the domestic inflation outlook," says the central bank.

After the recent reduction in excise duties, domestic retail prices of petroleum products have moderated. International crude oil prices, however, remain elevated, with risks of further pass-through to domestic pump prices, the central bank notes.

"There are also upside risks from revisions in the prices of electricity. Early results from manufacturing, services and infrastructure sector firms polled in the Reserve Bank's surveys expect further input and output price pressures going forward," it adds.

The restrictions on wheat exports should improve the domestic supplies but the shortfall in the rabi production due to the heat wave could be an offsetting risk, warns the RBI.

RBI's projections indicate that inflation is likely to remain above the upper tolerance level of 6% through the first three quarters of 2022-23.

On the assumption of a normal monsoon in 2022 and average crude oil price (Indian basket) of $105 per barrel, inflation is now projected at 6.7% in 2022-23, with Q1 at 7.5%; Q2 at 7.4%; Q3 at 6.2%; and Q4 at 5.8%, the Reserve Bank says.

The monetary policy committee, headed by RBI governor Shaktikanta Das, increased the policy repo rate by 50 basis points to 4.90%. The MPC also unanimously decided to remain focused on withdrawal of accommodation to ensure that inflation remains within the target going forward, while supporting growth.

"Countries across the world are facing inflation at decadal highs and persistent demand-supply imbalances. The war has led to globalisation of inflation," says Das.

While considerable uncertainty surrounds the inflation trajectory due to global growth risks and geopolitical tensions, the supply side measures taken by the government would help to alleviate some cost-push pressures, says the RBI. The MPC, however, notes that continuing shocks to food inflation could sustain pressures on headline inflation. "Persisting inflationary pressures could set in motion second round effects on headline CPI. Hence, there is a need for calibrated monetary policy action to keep inflation expectations anchored and restrain the broadening of price pressures," the central bank says.

CPI headline inflation rose further from 7% in March 2022 to 7.8% in April 2022, reflecting broad-based increase in all its major constituents. Food inflation pressures accentuated, led by cereals, milk, fruits, vegetables, spices and prepared meals. Fuel inflation was driven up by a rise in LPG and kerosene prices.

Since the MPC's meeting in May 2022, the global economy continues to grapple with multi-decadal high inflation and slowing growth, persisting geopolitical tensions and sanctions, elevated prices of crude oil and other commodities and lingering Covid-19 related supply chain bottlenecks, says the RBI. "Global financial markets have been roiled by turbulence amidst growing stagflation concerns, leading to a tightening of global financial conditions and risks to the growth outlook and financial stability."