RBI monetary policy review: FY23 inflation projections raised to 5.7%

Amid changed geo-political developments since its previous policy, the Monetary Policy Committee (MPC) of the central bank on Friday raised its projections for the retail price inflation rate to 5.7 per cent, which is close to 6 per cent, the upper limit of its tolerance level, for 2022-23 against 4.5 per cent estimated in the previous policy review.

The projection on inflation is based on the assumption of international crude oil prices of the Indian basket remaining at $100 billion a barrel. Any upward pressure on it would hike the inflation rate further.

Along with this, the Reserve Bank of India’s (RBI’s) committee forecast economic growth 60 basis points lower at 7.2 per cent for the current financial year against its February policy’s projections.

However, this may raise nominal GDP growth to 12.9 per cent, which is much higher than the 11.1 per cent assumed in the Budget. This may bring some positive news regarding resource mobilisation for the government in FY23 but higher inflation than assumed in the Budget would also raise the subsidy burden, particularly on fertiliser and food.

It should be noted that deflators used in GDP calculation are predominantly the wholesale price index and the consumer price index is just one-third of the total. So, nominal GDP growth cannot be gauged specifically but it could be said that it would be higher than the Budget assumption for 2022-23.

The new projections of the MPC came a day after the finance ministry said the economy faced twin challenges — growth may slow while inflation could remain elevated — due to disruption caused by the Russia-Ukraine war.

However, North Block is not willing to change its Budget assumption of nominal GDP growth.

A key finance ministry official said it was too early to revise nominal GDP growth projections.

“The year has just begun. There is no need to change nominal GDP projections now. We do not know where oil prices will be three or six months from now,” the person said.
 

The official, however, conceded the point that some of the Budget estimates, like fertiliser and food subsidy, no longer held.

The MPC’s new inflation projection for the first quarter of FY23 exceeds the upper tolerance level of 6 per cent. However, it is not projected to stay there, and the remaining quarters would see at least 5 per cent inflation in the current financial year.

This prompted RBI Governor Shaktikanta Das to tell a press conference that the central bank had now reordered priority to target inflation first and then growth through its monetary policy interventions.

Just before the onset of the pandemic, the RBI’s priority was to support growth first, followed by retail inflation targeting.

The official at North Block said: “We don’t want to comment on inflation as that is the RBI’s remit.”

However, he said the MPC’s growth projections were realistic, given how the Russia-Ukraine war had affected global macroeconomic conditions.

“We agree with the RBI’s GDP estimates. They are in a good position to assess this,” the official said.

The Union Budget assumes only nominal GDP growth. However, the 2021-22 Economic Survey had pegged FY23 real GDP growth at 8-8.5 per cent. This indicates that the Budget assumed inflation, a mix of the WPI and CPI, to be in the range 2.6-3.1 per cent.