In less than two months, the RBI boosted its inflation prediction by 220 basis points, the largest increase in more than a decade. However, considering that the assumption of a Crude price of $105 a barrel may have to be raised, it may be a conservative estimate.
Despite keeping its growth prediction for FY23 at 7.2 percent, the central bank boosted its inflation forecast for FY23 by 220 basis points to 6.7 percent, which is over its tolerance zone of 2-4 percent. However, these projections are based on oil prices of $105 per barrel, rather than the current $120 per barrel. According to analyst estimates, a $10 per barrel rise in crude prices would have a 50-60 basis point impact on CPI inflation.
According to Dharmakirti Joshi, chief economist at rating agency Crisil, the generalized rise in worldwide prices of food, energy, and industrial products that began around the war in Europe has not lessened. “This will put domestic food, gasoline, and core inflation under strain,” he warned.
As per the RBI governor, food products account for 75% of the rise in CPI estimates. The impact of global food and commodity price changes on CPI inflation is projected to be significant. “In the next months, we expect ten-year bond rates to trade in the range of 7.40 percent to 7.60 percent,” said Murthy Nagarajan, Head Of Fixed Income, Tata Mutual Fund.
Furthermore, some domestic concerns have not been sufficiently considered. “In the near-to-medium term, there are multiple upside risks to inflation, including commodities, food, MSP rises, energy price hikes, services sector, and delayed pass-through from WPI inflation,” said Kaushik Das, Deutsche Bank’s chief India economist. “As a result, even after the RBI’s substantial upward revision, CPI inflation in FY’23 might wind up being higher.”
The Reserve Bank of India appears to want to tread carefully. At a post-policy news conference in Mumbai, governor Shaktikanta Das noted, “Monetary policy measures take six to eight months to completely play out.” “We’ll keep an eye on everything.” We are unable to offer any advice due to the ambiguity of the issue.”
For the first three-quarters of FY23, the RBI anticipates inflation to average above the upper tolerance threshold of 6%. “We expect inflation will be much higher this year, averaging north of 6% for all four quarters,” said Pranjul Bhandari, HSBC’s top India economist. “We agree that present economic momentum is solid, driven by a surge of pent-up demand; however, we believe that growth will decelerate in 2HFY23 as the wave fades and urban inflation increases, reducing buying power.”
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