RBI sees retail inflation moderating to 4.5% in FY23: Here's why

The Reserve Bank of India on Thursday said inflation based on consumer price index (CPI) is expected to come well below its upper tolerance level, at 4.5 per cent, in the next fiscal year beginning April 2022, helped by fresh crop arrivals, supply-side interventions, as well as prospects of a good monsoon.

However, the hardening of crude oil prices presents a major upside risk to the inflation outlook.

The Reserve Bank of India (RBI) retained its inflation projection at 5.3 per cent for the current financial year.

Unveiling the last monetary policy for the current fiscal year, RBI Governor Shaktikanta Das said, core inflation remains elevated at tolerance-testing levels. Although the continuing pass through of tax cuts relating to petrol and diesel last November, would help to moderate the input cost pressures to some extent, he said.

RBI keeps a close watch on CPI inflation to decide on its bi-monthly monetary policy.

Retail inflation rose to a five-month high of 5.59 per cent in December, from 4.91 per cent in November, mainly due to an uptick in food prices.

MPC has been given the mandate to maintain annual inflation at 4 per cent until March 31, 2026, with an upper tolerance of 6 per cent and a lower tolerance of 2 per cent.

The Reserve Bank has kept its key repo rate -- at which it lends short-term money to banks -- unchanged for the 10th time in a row at 4 per cent, to support growth as well as manage the inflationary pressures.

"The transmission of input cost pressures to selling prices remains muted in view of the continuing slack in demand. Further as risks from Omicron (virus) wanes 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, that is the current quarter at 5.7 per cent on account of unfavourable base effect that eased subsequently," Das said.

Das further noted that CPI reading for January 2022, is expected to move closer to the upper tolerance band, largely due to adverse base effects. "Taking all these factors into consideration along with the assumption of a normal monsoon, CPI inflation for 2022-23, is projected at 4.5 per cent," Das said.

Presenting the view of the six-member rate setting Monetary Policy Committee, Das said the MPC also noted that the consumer price inflation has edged higher since the last meeting (in December), but largely along the anticipated lines.

"The increase in inflation in December was entirely due to an unfavourable base effect despite month-on-month decline in prices. Large buffer stocks of cereals and effective supply side measures augur well for food inflation.

Core inflation remains elevated but demand pull pressures are still muted. The renewed surge in international crude oil prices however needs to be closely monitored," the Governor said in his statement.

RBI expects the headline inflation to peak during the current quarter of this fiscal within the tolerance band and then moderate closer to target in the second half of next fiscal year (H2:2022-23).

Das said, output is just barely above its pre-pandemic level, while private consumption is still lagging. Global headwinds are accentuating.

"Overall, taking into consideration the outlook for inflation and growth, in particular the comfort provided by the improving inflation outlook, the uncertainties related to Omicron and global spillovers, the MPC was of the view that continued policy support is warranted for a durable and broad-based recovery," Das said.

Giving a quarterly projection for FY23 on retail inflation, RBI expects it to be at 4.9 per cent in Q1FY23; 5 per cent in the second quarter; 4 per cent in the third and at 4.2 per cent in the last quarter, with risks broadly balanced.

The Reserve Bank has also retained the overall CPI projection for the current fiscal year to be ending on March 31, 2022 at 5.3 per cent. The ongoing Q4 of 2021-22 is expected to settle with an inflation rate of 5.7 per cent, mainly on account of unfavourable base effects that ease subsequently.

Das said, the softening of food prices is providing welcome relief. The improving prospects for foodgrains production and the expected easing of vegetable prices on fresh winter crop arrivals are adding further optimism.

"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," he said.