Despite crude oil prices rising over $90 per barrel, the Reserve Bank of India (RBI) has projected lower retail inflation level of 4.5 per cent in the next fiscal, 2022-23, as against the inflation forecast of 5.3 per cent for 2021-22.
“The CPI (consumer price) inflation trajectory has moved in close alignment with our projections. In particular, the softening of food prices is providing welcome relief,” RBI Governor Shaktikanta Das said while unveiling the monetary policy. The improving prospects for foodgrain production and the expected easing of vegetable prices on fresh winter crop arrivals are adding further optimism, he said. The RBI’s policy objective is to target a CPI inflation of 4 per cent within a band of plus or minus 2 per cent.
Moreover, the softening of pulses and edible oil prices is likely to continue in response to strong supply side interventions by the Government and increase in domestic production, it said. “The hardening of crude oil prices, however, presents a major upside risk to the inflation outlook,” Das said.
The policy panel said core inflation remains elevated at tolerance testing levels, although the continuing pass through of tax cuts relating to petrol and diesel last November 4 would help to moderate input cost pressures to some extent. The transmission of input cost pressures to selling prices remains muted in view of the continuing slack in demand.
Further, as risks from Omicron wane and supply chain pressures moderate, there could be some softening of core inflation. On balance, the inflation projection for 2021-22 is retained at 5.3 per cent, with Q4 at 5.7 per cent on account of unfavourable base effects that ease subsequently, the RBI said.
“RBI projections on inflation for FY22 is retained at 5.3 per cent and all quarter-wise projections on inflation for FY23 are within the comfort zone of central bank. This gives comfort to the market as well as public,” said Indian Banks’ Association Chairman A K Goel.
The CPI reading for January is expected to move closer to the upper tolerance band, largely due to adverse base effects. Taking all these factors into consideration and on the assumption of a normal monsoon, CPI inflation for 2022-23 is projected at 4.5 per cent with Q1:2022-23 at 4.9 per cent; Q2 at 5 per cent; Q3 at 4 per cent; and Q4 at 4.2 per cent, with risks broadly balanced. “… the RBI indicates a glide path for inflation going down to the 4% handle in Q3 and Q4 FY23,” said Indranil Pan, chief economist, Yes Bank.