Reserve Bank of India projects inflation at 6.7 per cent in FY23

The RBI on Wednesday increased the inflation estimate by 100 basis points to 6.7% in 2022-23. In the April policy statement, the central bank had pegged inflation at 5.7%.

Governor Shaktikanta Das while announcing a 50 basis points increase in repo rate to 4.9% said: “Consequent to the recent reduction in excise duties, domestic retail prices of petroleum products have moderated. International crude oil prices, however, remain elevated, with risks of further pass-through to domestic pump prices. There are also upside risks from revisions in the prices of electricity. Early results from manufacturing, services and infrastructure sector firms polled in the Reserve Bank’s surveys expect further input and output price pressures going forward.”

The central bank expects the retail inflation to be at 7.5% in the first quarter, 7.4% in Second, 6.2% in third and 5.8% in the fourth quarter.

Meanwhile, it has retained the 2022-23 GDP growth estimate at 7.2%. In the first quarter of the financial year, the GDP growth is expected to be 16.2% followed by 6.2% in Q2, 4.1% in Q3 and 4.0% in Q4.

In its policy statement, the RBI said that the recovery in domestic economic activity is gathering strength. “Rural consumption should benefit from the likely normal south-west monsoon and the expected improvement in agricultural prospects. A rebound in contact-intensive services is likely to bolster urban consumption, going forward. Investment activity is expected to be supported by improving capacity utilisation, the government’s capex push, and strengthening bank credit. Growth of merchandise and services exports is set to sustain the recent buoyancy,” said the statement.

However, the central bank believes that spillovers from prolonged geopolitical tensions, elevated commodity prices, continued supply bottlenecks and tightening global financial conditions nevertheless weigh on the outlook.

Meanwhile, given the high inflation estimates (higher than the RBI’s upper tolerance level of 6%) in the first three quarters of the financial year, experts see another 50-60 basis points increase in repo rates.

“We foresee further repo hikes of 35 bps and 25 bps, respectively, in the next two policies,” says Aditi Nayar, chief economist, Crisil Ltd.