BS policy poll: RBI likely to hike inflation forecast, say economists

Most respondents see status quo on repo, reverse repo and stance

With the pump prices of petrol and diesel going up by Rs 8 in less than two weeks, the Reserve Bank of India (RBI) is expected to increase its inflation forecast from 4.5 per cent for the current fiscal year, all the 10 participants of a poll conducted by Business Standard said.

The six-member monetary policy committee of the RBI will meet from April 6 to 8 to review the policy, the outcome of which will be announced on the last day of the meeting.

None of the participants saw any change in the key policy rate or the repo rate while an overwhelming majority said the status quo would be maintained both on the reverse repo rate and the stance of the policy, which has been kept accommodative for about two years.

“They (RBI) will maintain the status quo on the repo rate, citing re-emergence of growth concerns owing to the Russia-Ukraine war, elevated prices of commodities, especially crude oil, and increased supply-side disruptions,” said Rupa Rege Nitsure, Group chief economist with L&T Finance Holdings.               

Only a few of the participants see a change on the GDP growth projection for the current fiscal year. The RBI has projected a GDP growth rate of 7.8 per cent for FY23 during the last policy review in February.

“Inflation and fiscal risks have started to materialise in India … At the upcoming April 8 policy meeting, the RBI is likely to lower its projection for GDP growth and raise CPI (consumer price index) inflation,” Nomura said in a report.

“There is a reasonable likelihood that the RBI will take its first reluctant step towards policy rate normalisation by changing stance from ‘accommodative’ to ‘neutral’, but we expect it to balance it with dovish guidance,” the report said.

Nomura expects inflation to breach the RBI’s 2-6 per cent target range, averaging 6.3 per cent in 2022 due to the hike in petrol and diesel prices.

Nitsure says the inflation forecast for FY23 could be revised to 5.7-5.8 per cent.

“Inflation forecasts could be revised materially higher, accounting for elevated prices of motor fuels, followed by gold, cooking gas, cooking oils, and kerosene. We think the MPC could also indicate a role for fiscal policy to shield domestic prices,” said Rahul Bajoria, managing director and chief India economist, Barclays.

When the pandemic broke out in 2020, the RBI was proactive with a back-to-back reduction in the repo rate by 115 basis points in total. It has been maintaining an ultra-loose policy since the pandemic started though some of the liquidity measures have been rolled back in the last financial year as growth recovered from the lows of 2020-21. The central bank has said the accommodative stance of the policy will be maintained until growth recovery becomes sustainable. It has not changed the repo rate since the May policy review meeting of 2020.

However, inflation concerns have resurfaced now following the sharp rise in fuel prices in the past two weeks. The fuel price hike became necessary after global crude oil prices surged past $100/bbl for the first time since 2014, following the Russian invasion of Ukraine in late February.

“Borrowing an analogy from Stanley Fischer, the problem with inflation is that it is insidious: Long-run effects are more harmful, and ignorance about them in the short term could turn out to be anything but bliss. We believe inflation does pose a threat currently even at the cost of supporting an incipient growth recovery,” said Soumya Kanti Ghosh, Group chief economic adviser, State Bank of India.

Suman Chowdhury, chief analytical officer, Acuite Ratings & Research, said: “Due to overwhelming risks to India’s inflation outlook amid spurt in commodity prices along with tighter global financial conditions, we expect the central bank to revise its inflation forecast upwards and lay the ground for a gradual exit from their accommodative stance.”

On growth, most participants felt the central bank would wait longer to review the forecast.

The RBI has projected real GDP growth for 2022-23 at 7.8 per cent. GDP growth in Q1 is seen at 17.2 per cent, in Q2 at 7 per cent, in Q3 at 4.3 per cent, and in Q4 at 4.5 per cent.

Bajoria said the growth forecast might change only by a small amount.

“We expect the RBI to acknowledge the high degree of uncertainty and challenges to the growth outlook such as the European conflict, aggressive tightening by central banks in advanced economies, and the ongoing Covid outbreak in China,” he said.

Madan Sabnavis, chief economist of Bank of Baroda, said the RBI might revise the growth projection marginally lower by 25 bps.