RBI retains FY23 inflation forecast at 6.7 per cent, expects it to be under control January onwards

Mumbai: The RBI on Friday retained its inflation projection for FY23 at 6.7 per cent amid geopolitical concerns triggered by Russia-Ukraine war, and expected inflation to be under control from January.

The central bank is mandated to keep retail inflation in a band of 2-6 per cent. Inflation has remained above RBI's upper tolerance level of 6 per cent since January 2022. It ruled over 7 per cent in April, May and June. July saw a breather with inflation sliding to 6.7 per cent. Last month, inflation touched 7 per cent.

The RBI on Friday raised key repo - the rate at which it lends short-term money to banks - by another 50 basis points to 5.90 per cent with immediate effect to rein in rising inflation while supporting growth.

At the beginning of this fiscal year, pressures due to imported inflation were acute which have now eased, but it remains at elevated levels across food and energy items, RBI Governor Shaktikanta Das said while unveiling the outcome of its six-member Monetary Policy Committee (MPC) meeting.

Edible oil prices are likely to remain contained due to improved supplies from producing nations as well as steps taken by the government on price front.

Going forward, there could be some tapering of selling price rise on account of easing supply conditions and softening of industrial metal and crude oil prices.

With services activity showing strong rebound and some improvement in pricing power, risks of higher pass-through of input costs, however, do remain, the governor said.

"Taking into account these factors, the inflation projection is retained at 6.7 per cent in 2022-23, with Q2 at 7.1 per cent; Q3 at 6.5 per cent; and Q4 at 5.8 per cent, with risks evenly balanced," Das said.

The consumer price index (CPI) based inflation is projected to further reduce to 5 per cent in first quarter of next fiscal year beginning April 2023.

The RBI governor said India faces upside risks to food prices, while underlining that cereal price pressure is spreading from wheat to rice in anticipation of lower kharif paddy output.

"The lower sowing for kharif pulses could also cause some pressures. The delayed withdrawal of monsoon and intense rain spells in various regions have already started to impact vegetable prices, especially tomatoes. These risks to food inflation could have an adverse impact on inflation expectations." The world witnessed a major shock of the pandemic in the last two and half years which was exacerbated by the Ukraine conflict in late February this year, Das said, adding these "shocks have produced profound impact on the global economy".

"The extraordinary global circumstances that caused the heightened inflationary pressures have impacted both AEs (advanced economies) and EMEs (emerging market economies). India is, however, better placed than many of these economies.

"If high inflation is allowed to linger, it invariably triggers second order effects and unsettles expectations. Therefore, monetary policy has to carry forward its calibrated action on policy rates and liquidity conditions consistent with the evolving inflation growth dynamics. It must remain alert and nimble," Das said.

The Reserve Bank has raised repo rate by 190 basis points or 1.90 per cent since May. The US Federal Reserve and advanced European economies too have sharply raised interest rates to fight soaring inflation, mainly triggered by supply side woes on Russia-Ukraine war.