The decision by the Monetary Policy Committee of the Reserve Bank of India to hold rates was on expected lines but economists believe that its inflation projection may be on the lower side.
Experts termed the retail inflation projection for 2022-23 at 4.5 per cent as dovish and expect it to rise to 5 per cent or more next fiscal.
But the lower inflation projection would have given comfort to retain rates and maintain the accommodative stance as growth remains the key priority.
Surprise move
“The market was broadly expecting a drawdown of ultra-accommodative monetary policy by a partial restoration of the repo-reverse repo rate corridor, with some even expecting forward guidance on further monetary policy normalisation. Instead, the RBI surprised by not only doubling down on its now familiar orthodoxy of keeping rates and stance unchanged, but also expressed a very dovish outlook for the inflation for FY23, forecasting it at 4.5 per cent,” said Aurodeep Nandi, India Economist and Vice President, Nomura.
He pointed out that this comes despite higher oil and commodity prices, growth-supporting fiscal policy, continued economic normalisation, and a distinctly hawkish Federal Reserve.
DK Srivastava, Chief Policy Advisor, EY India said the RBI may reconsider its growth and inflation forecasts and its policy stance early in the next fiscal year.
“During October-December 2021, WPI inflation rate averaged 13.9 per cent. This is bound to pull up CPI inflation rate also. There would also be some pressure on interest rate on government borrowing due to its large gross borrowing program in FY23,” he noted, adding that the European Central Bank and the US Fed are likely to continue their effort to firm up their policy rates.
CPI-based inflation
Inflation based on consumer price index (CPI) touched a five-month high of 5.59 per cent in December, and the data for January will be released in the following days. The RBI has warned that an adverse base effect may prevent a substantial easing of food inflation in January.
Questions remain about high core inflation as well as global crude oil prices.
Bank of Baroda in a note said, it expects CPI to remain elevated at about 5.5 per cent in 2021-22 and at 5 per cent and 5.5 per cent in 2022-23.
“Notably, another upside risk to inflation is the possibility of a below normal monsoon. Statistically, with six successive monsoons, there could be a sub-optimal one this year. Thus, it might push food inflation further in the coming fiscal,” it said, adding that its forecast also incorporates 10 per cent increase in crude prices which will impact CPI by about 0.4-0.6 per cent.
HSBC Global Research forecast CPI inflation at 5 per cent in 2022-23.
“We believe inflation pressures are higher than the RBI is estimating. One, global oil prices rose sharply in January, and are yet to make their way into domestic pump prices. Even without assuming a complete pass-through, we forecast CPI inflation at 5 per cent in FY23. Two, manufacturers’ margins remain depressed and the pass-through of higher input costs to consumers could raise inflation higher. Three, some food items, too, are showing early signs of a price pick-up,” it said.
The RBI’s optimism stems from softening food inflation and prospects of a good Rabi harvest. It also expects that the outlook for crude oil prices, which is uncertain by geopolitical developments, may turn more favourable this year. Further, its surveys point towards some softening in the pace of increase in selling though cost-push pressures on core inflation may continue in the near term.