The Reserve Bank of India (RBI) on Friday raised the policy rate by another 50 basis points (bps) to 5.9% as retail inflation or Consumer Price Index (CPI) continues to remain above the central bank’s threshold of 6% mark for the first eight months of 2022. The RBI governor Shaktikanta Das-led Monetary Policy Committee (MPC) has also retained the inflation forecast for FY23 at 6.7% amid upside risks to food prices.

“In the MPC’s view, inflation is likely to be above the upper tolerance level of 6% through the first three quarters of 2022-23, with core inflation remaining high. The outlook is fraught with considerable uncertainty, given the volatile geopolitical situation, global financial market volatility and supply disruptions,” the RBI says in the monetary policy statement.

The MPC opined that a further calibrated monetary policy action is warranted to keep inflation expectations anchored, while it decided to remain focused on withdrawal of accommodation to ensure that costs remain within the target going forward, while supporting growth.

The RBI expects CPI-based inflation to be 7.1% in July-September quarter (Q2 FY23), 6.5% in October-December, and 5.8% in January-March quarter of the current fiscal. CPI inflation is seen at 5 per cent in the first quarter of the next financial year. For the first quarter of the next fiscal (Q1 FY24), CPI has been pegged at 5%. Besides, the apex bank has targeted to keep inflation level at around 4%, with a flexibility of 2 per cent on either side. 

Most recent CPI print shows that retail inflation increased to 7% year-on-year in August from 6.7% in July as food inflation moved higher, driven by prices of cereals, vegetables, pulses, spices and milk. Fuel inflation moderated with reduction in kerosene (PDS) prices, though it remained in double digits. Core CPI (i.e., CPI excluding food and fuel) inflation remained sticky at heightened levels, with upside pressures across various constituent goods and services. It had remained close to around 7% during the current financial year 2022-23 so far as food inflation remained elevated despite decline in oil and commodity prices, the RBI says in its report.

“High and protracted uncertainty surrounding the course of geopolitical conditions weighs heavily on the inflation outlook. Commodity prices, however, have softened and recession risks in advanced economies (AEs) are rising. On the domestic front, the late recovery in sowing augurs well for kharif output. The prospects for the rabi crop are buffered by comfortable reservoir levels. The risk of crop damage from excessive/unseasonal rains, however, remains. These factors have implications for the food price outlook,” the report highlighted.

As per the report, elevated imported inflation pressures remain an upside risk for the future trajectory of inflation, amplified by the continuing appreciation of the U.S. dollar.

On outlook for crude oil, the RBI said that the prices are highly uncertain and tethered to geopolitical developments, with attendant concerns relating to both supply and demand. The average crude oil price (Indian basket) is projected to be $100 per barrel in 2022-23.

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