RBI deputy governor Patra sees FY22 inflation at 5.7% or lower

Economists say RBI likely to revise inflation forecast downward in October policy

The fall in retail inflation to 5.3% in August, which stayed within the Reserve Bank of India’s target range for two successive months, could lead the central bank to revise the inflation projection for the current financial year.

In the August review of monetary policy, RBI revised its inflation projection for the current financial year upward to 5.7% from 5.1% projected in the June policy review.

“Taking into account the outlook on growth and inflation and keeping in mind the inherent output costs of disinflation, it is pragmatic to envisage a glidepath along which the MPC can steer the path of inflation into the future,” said RBI’s deputy governor Michael Patra, at the Financial Markets Summit organised by the Confederation of Indian Industry on Thursday.

“The envisaged glidepath should take inflation down to 5.7 per cent or lower in 2021-22, to below 5 per cent in 2022-23 and closer to the target of 4 per cent by 2023-24,” Patra said.

The six-member monetary policy committee will meet on 6-8 October to review the policy – and the decision of the review will be announced on October 8.

Economists agree with the deputy governor’s assessment of the inflation situation as they see scope for lowering the inflation forecast.

“I think there is some room for inflation to undershoot RBI’s forecast of 5.7%,” said Sameer Narang, chief economist, Bank of Baroda.

“Our forecast is 5.5% for FY22, assuming oil prices will not go up further. The good prints will continue all the way till November because of the high base, mainly of vegetable prices. Post that, the base is not favourable,” Narang told Business Standard.

Consumer price-index-based inflation or retail inflation fell to a four month low of 5.3% in August as compared to 5.59% in July as supply side constraint ease. Food prices, which account for nearly half of the inflation basket, rose 3.11% year-on-year in August from 3.96% a month before.

“If you see the latest inflation print it is 5.3%. So, there is a scope for a downward revision of inflation projection,” said Anagha Deodhar, Chief Economist at ICICI Securities.

“I see inflation ebbing a bit going forward. We expected once the new crop enters the market the inflation pressures will ease. If you see the latest trend, cereals – which is a big part of the food basket – have recorded negative inflation. This could help inflation to come down,” she said.

Apart from cereals, going forward, vegetable prices could also help in lowering the headline inflation,

“For the month of September, high frequency data show more signs of moderation in cereals and vegetables prices, though pulses and edible oils continue to rise. With August CPI showing a continued downward trend, we do not rule out a small downward revision in the RBI’s inflation estimates for FY22,” Rahul Bajoria, Chief India Economist said in a note after the August inflation numbers were released on Monday.

The monetary policy committee of the RBI has a mandate to target inflation at 4%, with a variable of 2% on both sides.

In his speech at the CII event, Patra said in the MPC’s assessment, inflationary pressures are largely driven by supply shocks which are typically transitory in nature.

“Although shocks of this type are typically transitory, the repetitive incidence of shocks is giving inflation a persistent character... Contributions to inflation are emanating from a narrow group of goods – items constituting around 20 per cent of the CPI are responsible for more than 50 per cent of inflation,” he said while adding analysis of inflation dynamics indicates that the easing of headline inflation from current levels is likely to be uneven.