India: RBI keeps inflation projection unchanged at 6.7%

Accordingly, the MPC decided to increase the policy repo rate by 50 basis points to 5.40 per cent

By ANI

Published: Fri 5 Aug 2022, 2:16 PM

On Friday, the Reserve Bank of India decided to keep inflation projection for the current financial year unchanged, at 6.7 per cent, and said that the retail inflation would remain above the upper tolerance level of 6 per cent, through the first three quarters of 2022-23.

"Incidence of unseasonal and excessive rainfall, if any, can impact food prices, especially vegetable prices. Greater transmission of input cost pressures to selling prices across manufacturing and services sectors may also create fresh price pressures. Moreover, persistently elevated cost of living conditions could translate to higher wages and further price increases, especially if pricing power of firms strengthen," said RBI Governor Shaktikanta Das after the Monetary Policy Committee meeting.

"Taking into account these factors, and on the assumption of a normal monsoon in 2022 and average crude oil price (Indian basket) of $105 per barrel, inflation is projected at 6.7 per cent in 2022-23, with Q2 at 7.1 per cent; Q3 at 6.4 per cent; and Q4 at 5.8 per cent, with risks evenly balanced. CPI inflation for Q1:2023-24 is projected at 5.0 per cent," the RBI Governor said.

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In the Monetary Policy Statement, the RBI's Monetary Policy Committee (MPC) noted that the "spillovers from geopolitical shocks are imparting considerable uncertainty to the inflation trajectory. More recently, food and metal prices have come off their peaks. International crude oil prices have eased in recent weeks, but remain elevated and volatile on supply concerns, even as the global demand outlook is weakening."

"The appreciation of the US dollar can feed into imported inflation pressures. Rising kharif sowing augurs well for the domestic food price outlook. The shortfall in paddy sowing, however, needs to be watched closely, although stocks of rice are well above the buffer norms.

Firms polled in the Reserve Bank's enterprise surveys expect input cost pressures to soften across sectors in H2. Cost pressures are, however, expected to get increasingly transmitted to output prices across manufacturing and services sectors," the MPC noted in the statement.

Headline inflation has recently flattened and the supply outlook is improving, helped by some easing of global supply constraints.

The MPC, however, noted that inflation is projected to remain above the upper tolerance level of 6 per cent through the first three quarters of 2022-23, entailing the risk of destabilising inflation expectations and triggering second round effects.

Given the elevated level of inflation and resilience in domestic economic activity, the MPC took the view that further calibrated monetary policy action is needed to contain inflationary pressures, pull back headline inflation within the tolerance band closer to the target, and keep inflation expectations anchored so as to ensure that growth is sustained.

Accordingly, the MPC decided to increase the policy repo rate by 50 basis points to 5.40 per cent. It also decided to remain focused on the withdrawal of accommodation, in order to ensure that inflation remains within the target going forward, while supporting growth.

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