RBI retains CPI inflation forecast at 5.3% for FY22, 5.7% for March quarter

The consumer price index (CPI) inflation forecast for the financial year 2021-22 has been retained at 5.3% with risks broadly balanced, says Shaktikanta Das, governor of Reserve Bank of India (RBI), on Thursday. For the ongoing January-March quarter of the current fiscal, the CPI inflation has been pegged at 5.7% due to “adverse base effect”.

The RBI governor says the CPI inflation has moved along the expected trajectory since the last monetary policy committee (MPC) in December 2021. However, it is expected to move closer to RBI’s upper margin of 6% in January amid adverse base effect, which is likely to prevent a substantial easing of food inflation during the month under review, said Das.

As per the RBI survey report, inflation is likely to moderate in the first half of the next fiscal and move closer to the target rate thereafter, providing room to remain accommodative. Besides, measures announced in the Union Budget 2022-23 are likely to boost aggregate demand, it noted.

“Going forward, vegetable prices are expected to ease further on fresh winter crop arrivals. The softening in pulses and edible oil prices is likely to continue in response to strong supply-side interventions by the government and an increase in domestic production. Prospects of a good rabi harvest add to the optimism on the food price front. Adverse base effect, however, is likely to prevent a substantial easing of food inflation in January,” says Das, following the conclusion of a three-day MPC meeting that came nine days after the Union Budget 2022.

Going forward, cost-push pressures on core inflation may continue in the near term, but the pace of increase in selling prices by the manufacturing and services firms is expected to be slow, Das says.

“On balance, the inflation projection for 2021-22 is retained at 5.3%, with Q4 at 5.7%. On the assumption of a normal monsoon in 2022, CPI inflation for 2022-23 is projected at 4.5% with Q1:2022-23 at 4.9%; Q2 at 5%; Q3 at 4%; and Q4:2022-23 at 4.2%, with risks broadly balanced,” he adds.

Commenting on the recent surge in oil prices, Das says, “The outlook for crude oil is rendered uncertain by geopolitical developments even as supply conditions are expected to turn more favourable during 2022”. The global benchmark Brent crude spiked nearly 20% in 2022 and breached $93 a barrel mark last week due to tight supplies and escalating political tensions between Russia and Ukraine. The rebound in global fuel demand also pushed prices higher.

The CPI inflation, which is seen as a direct trigger for the RBI's interest rate hikes, rose to a five-month high of 5.59% in December, from 4.9% in November due to large adverse base effects. The food group registered a significant decline in prices in December, primarily on account of vegetables, meat and fish, edible oils and fruits, but sharp adverse base effects from vegetables prices resulted in a rise in inflation on an annual basis. Inflation in the food basket rose to 4.05%, from 1.87% in November, due to a sharp rise in the prices of oils and fats.

Rising inflation is a global concern and central banks around the world have turned hawkish or begun to signal a shift in policy stance in the near future to tame inflation.

The RBI, in its first bi-monthly policy meeting of the calendar year 2022, maintained the status quo for the tenth consecutive time and continued to maintain an ‘accommodative’ stance to help revive the economy. The policy repo rate was kept unchanged at 4%, while the reverse repo rate was also left unchanged at 3.35%. The central bank has pegged real GDP growth for FY23 at 7.8%.