India’s FY23 retail inflation rate projection raised to 5.7%

The Reserve Bank of India (RBI) raised India’s retail inflation rate projection for FY23. Accordingly, inflation projection for 2022-23 has been raised to 5.7 per cent from an earlier estimation of 4.5 per cent

In his policy statement post the Monetary Policy Committee’s (MPC) bi-monthly meeting, RBI Governor Shaktikanta Das said: “Taking into account these factors and on the assumption of a normal monsoon in 2022 and average crude oil price (Indian basket) of $100 per barrel, inflation is now projected at 5.7 per cent in 2022-23, with Q1 at 6.3 per cent; Q2 at 5.8 per cent; Q3 at 5.4 per cent; and Q4 at 5.1 per cent.”

The Governor said that the heightened geopolitical tensions since February end have upended the earlier narrative and considerably clouded the inflation outlook for the year.

“On the food price front, a likely record Rabi harvest would help to keep domestic prices of cereals and pulses in check. Global factors such as the loss of wheat supply from the Black Sea region and the unprecedented high international prices of wheat could, however, put a floor under domestic wheat prices.

“Edible oil price pressures are likely to remain elevated in the near-term due to export restrictions by key producers as well as loss of supply from the Black Sea region,” he said.

Besides, the RBI Governor said that feed cost pressures could continue due to global supply shortages, which could also have a spillover impact on poultry, milk and dairy product prices.

On non-food items, he cited that the spike in international crude oil prices since February-end poses substantial upside risk to inflation through both direct and indirect effects.

“Sharp increase in domestic pump prices could trigger broad-based second round price pressures. A combination of high international commodity prices and elevated logistic disruptions could aggravate input costs across agriculture, manufacturing and services sectors.

“Their pass-through to retail prices, therefore, warrants continuous monitoring and pro-active supply management,” he said.

On Friday, the RBI’s MPC maintained the repo rate, or short-term lending rate, for commercial banks, at 4 per cent.

In addition, the growth-oriented accommodative stance was also retained.

Meanwhile the Reserve Bank of India on Friday lowered India’s FY23 GDP growth projection to 7.2 per cent from an earlier estimation of 7.8 per cent.  In a statement after the Monetary Policy Committee’s bi-monthly meet, RBI Governor Shaktikanta Das said the real GDP growth is projected at 16.2 per cent in the first quarter of FY23, at 6.2 per cent in Q2; at 4.1 per cent in Q3 and Q4 at 4 per cent, assuming that crude oil (Indian basket) price is at $100 per barrel during 2022-23.

“As the horizon was brightening up, escalating geopolitical tensions have cast a shadow on our economic outlook. Although India’s direct trade exposure to countries at the epicentre of the conflict is limited, the war could potentially impede the economic recovery through elevated commodity prices and global spillover channels,” he said.

“Further, financial market volatility induced by monetary policy normalisation in advanced economies, renewed Covid-19 infections in some major countries with augmented supply-side disruptions and protracted shortages of critical inputs, such as semi- conductors and chips, pose downside risks to the outlook.”

Besides, the governor said that going forward, robust Rabi output should support recovery in the rural demand, while a pick-up in contact-intensive services should help in further strengthening urban demand.

“Investment activity may gain traction with improving business confidence, pick up in bank credit, continuing support from government capex and congenial financial conditions.”

The Reserve Bank of India raised its inflation forecast for the current fiscal year to 5.7 per cent, 120 basis points above its forecast in February, while cutting its economic growth forecast to 7.2 per cent for 2022/23 from 7.8 per cent.

“We have now put inflation before growth. So that is the sequence of our priorities - first is inflation followed by growth,” Das said, adding that this was the first time in three years that the RBI was putting inflation in the forefront.

Das said RBI will gradually withdraw system liquidity over a multi-year timeframe beginning this year but will do it in a non-disruptive manner. He said economic activity is barely above pre-pandemic levels but continues to steadily recover.

Das said the MPC voted unanimously to keep the repo rate unchanged and to retain an ‘accommodative’ monetary policy stance.

But he added that the focus is on the withdrawal of accommodation.

Inflation has held above the RBI’s 6 per cent upper threshold so far this year, casting doubt on its strategy of keeping rates low to bolster growth even as some other central banks are already raising borrowing costs to tamp down price pressures.