The Reserve Bank of India (RBI) has increased the inflation forecast by 100 basis points to 6.7 per cent from 5.7 per cent for the financial year 2022-23. “With the assumption of a normal monsoon in 2022 and average crude oil price (Indian basket) of US$ 105 per barrel, inflation is now projected at 6.7 per cent in 2022-23,” governor Shaktikanta Das said while announcing the decisions of RBI bi-monthly monetary policy committee (MPC).
“The global geopolitical situation remains fluid and commodity markets remain
on the edge, rendering heightened uncertainty to the domestic inflation outlook,” Das added. Considering the situation, RBI MPC has revised retail inflation projection to 7.5 per cent for April-June quarter ; 7.4 per cent for July to September quarter; 6.2 per cent for October to December quarter and 5.8 per cent for January to March quarter of FY23.
In April monetary policy committee meeting, the RBI had pegged CPI inflation at 6.3 per cent for April-June, 5.8 per cent for July-September, 5.4 per cent for October-December, and 5.1 per cent for January-March for FY23.
“Further, the baseline inflation projection of 6.7 percent for FY23 does not take into account the impact of monetary policy actions taken today,” RBI Governor Shaktikanta Das said
The sharp jump in inflation projection comes after after retail inflation jumped to a near eight-year high of 7.79 per cent in April. Shaktikanta Das mentioned Russian invasion in Ukraine behind the steep jump in inflation across the world. “… inflation has steeply increased much beyond the upper tolerance level. A large part of the rise in inflation is primarily attributed to a series of supply shocks linked to the war,” he mentioned.
The central bank has increased the repo rate by 50 basis point to 4.9 per cent in its bi-monthly monetary policy meeting held between June 6-8. “We have already reprioritised our policies to control inflation, without losing sight of the growth requirements,” Das added. RBI MPC has decided to focus on calibrated withdrawal of accommodation while supporting growth. RBI retained its growth estimates at 7.2 per cent for FY23.
Will Higher Interest Rates Bring Down Inflation?
“Interestingly, while the RBI increases its FY23 inflation forecast to 6.7 per cent, GDP growth projection is kept unchanged at 7.2 per cent. We wonder that if higher interest rates don’t hurt growth, how will it help bring down inflation? It also suggests that most of the excess inflation is due to global-supply-side factors,” Nikhil Gupta, chief economist, Motilal Oswal group.
“Since the RBI continues to forecast strong growth, it is very likely that it delivers another 25 bps hike on August 24 before it takes a pause. Our fear is that growth could see a serious deceleration in H2FY23 and FY24 on the back of such steep tightening and structural constraints,” he added.