India's retail inflation fell from an eight-year high of 7.79% in April to 7.04% in May, staying above the Reserve Bank of India's upper tolerance limit for the fifth straight month.
Inflation in the food basket declined from 8.31% in April to 7.97% in May. Rural inflation eased to 7.01% from 8.38% in the previous month, while urban inflation remained stable at 7.08%.
Inflation based on the consumer price index dropped following the government's tax cut on petrol and diesel last month. In an effort to control rising inflation, the central government on May 21 announced a reduction in the central excise duty on petrol and diesel, ₹200 subsidy on LPG gas cylinders, among other measures. The excise duty cut on petrol and diesel and subsidy outgo on LPG cylinders will cost over ₹1 lakh crore to the central government.
Last week, the Reserve Bank of India 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.
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 noted.
"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 added.
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 said.
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 focussed on withdrawal of accommodation to ensure that inflation remains within the target going forward.
Meanwhile, Morgan Stanley has revised India's FY23 projected growth from 7.9% to 7.6% citing impact of inflation on global growth, which, it says, will slow from 6.2% in 2021 (calendar year) to 2.9% in 2022.
Morgan Stanley says within Asia, India will be "most exposed to upside risk" from inflation owing to high energy import costs. The World Bank, too, has cut India's FY2023 growth forecast from 8.7% to 8% due to supply bottlenecks and inflation.