The Reserve Bank of India (RBI) on Wednesday kept the inflation target for the current financial year 2022-23 (FY23) unchanged at 6.7%, while cautioning that the battle against inflation is not over yet. RBI Governor Shaktikanta Das, who heads the six-member Monetary Policy Committee (MPC), said the central bank will keep "Arjuna's eye" on evolving inflation dynamics as core inflation (CPI, excluding food and fuel) remained sticky and exposed to global factors. He said that inflation is expected to remain above 4% over the next 12 months.

The RBI MPC has revised the inflation projection for Q3 to 6.6% and Q4 to 5.9%, from 6.4% and 5.8%, respectively, estimated during the September policy. “Assuming an average crude oil price (Indian basket) of $100 per barrel, inflation is projected at 6.7% in 2022-23, with Q3 at 6.6% and Q4 at 5.9%, and risks evenly balanced,” the central bank said today.

The CPI inflation, a measure of the retail inflation rate in India, has been projected at 5% for Q1 FY24, and 5.4% for Q2 FY24, on the assumption of a normal monsoon.

The MPC opined that further calibrated monetary policy action is warranted to keep inflation expectations anchored, break the core inflation persistence and contain second round effects, to strengthen medium-term growth prospects. As a result, the panel raised the policy repo rate by 35 basis points to 6.25%, while it decided to remain focused on the withdrawal of accommodation to ensure that inflation remains within the target going forward, while supporting growth.

The recent data showed the CPI inflation moderated to 6.8% (year-on-year) in October 2022 from 7.4% in September, with favourable base effects mitigating the impact of pick-up in price momentum in October. However, the retail inflation target remained elevated over the upper tolerance limit of 6% since January this year.

“Food inflation softened, aided by easing inflation in vegetables and edible oils, despite sustained pressures from prices of cereals, milk and spices. Fuel inflation registered some easing in October, driven by softening of price inflation in LPG, kerosene (PDS) and firewood and chips. Core CPI (i.e., CPI excluding food and fuel) inflation persisted at elevated levels at 6%, with price pressures across most of its constituent sub-groups,” RBI said in the policy report.

As per the report, going ahead, the inflation trajectory would be shaped by both global and domestic factors. “Adverse climate events – both domestic and global – are increasingly becoming a significant source of upside risk to food prices. Global demand is weakening. Unabating geopolitical tensions continue to impart uncertainty to the food and energy prices outlook. The correction in industrial input prices and supply chain pressures, if sustained, could help ease pressures on output prices; but the pending pass-through of input costs could keep core inflation firm. Imported inflation risks from the US dollar movements need to be watched closely,” it said. 

Meanwhile, the RBI has lowered the GDP growth forecast for the current fiscal to 6.8%, with Q3 at 4.4% and Q4 at 4.2%. The MPC has said the reasons for slashing the FY23 GDP target are headwinds emanating from protracted geopolitical tensions, global slowdown and tightening of global financial conditions.

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