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Inflation Forecast For Current FY Increased to 6.7%

As per the RBI's new projection announced after the Monetary Policy Committee (MPC) meeting, inflation is likely to remain above the central bank's upper tolerance limit of 6 per cent for the first three quarters of 2022-23.

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The Reserve Bank of India (RBI) raised inflation forecast for the current financial year to 6.7 per cent from its earlier projection of 5.7 per cent.

As per the RBI’s new projection announced after the Monetary Policy Committee (MPC) meeting, inflation is likely to remain above the central bank’s upper tolerance limit of 6 per cent for the first three quarters of 2022-23.

Inflation is projected to remain 7.5 per cent in the first quarter of the current financial year. In the second quarter, it is projected at 7.4 per cent. For the third quarter, it is projected at 6.2 per cent.

Inflation is likely to come within the RBI’s tolerance limit in the fourth quarter of 2022-23. For the fourth quarter of the current financial year, the RBI’s forecast for inflation is 5.8 per cent.

“It may be noted that around 75 per cent of the increase in inflation projections can be attributed to the food group. Further, the baseline inflation projection of 6.7 per cent for 2022-23 does not take into account the impact of monetary policy actions taken today,” RBI Governor Shaktikanta Das said in the monetary policy statement.

Between February and April, headline inflation has increased by about 170 basis points. With no resolution of the war in sight and the upside risks to inflation, prudent monetary policy measures would ensure that the second-round effects of supply-side shocks on the economy are contained and long-term inflation expectations remain firmly anchored and inflation gradually aligns close to the target, he said.

“The monetary policy actions including withdrawal of accommodation will be calibrated keeping in mind the requirements of the ongoing economic recovery,” Das added.

Inflation has been above the RBI’s 2-6 per cent target band since the beginning of this year.

As per the latest available data, India’s Consumer Price Index (CPI) based inflation surged to eight-year high of 7.79 per cent in April. It was the fourth consecutive month when inflation touched or was above the upper tolerance level of 6 per cent. The surge in headline inflation was seen across all major categories.

In order to tame the inflationary pressure, the RBI on Wednesday decided to hike policy repo rate by 50 basis points to 4.9 per cent.

The global geopolitical situation remains fluid and commodity markets remain on the edge, rendering heightened uncertainty to the domestic inflation outlook. Certain positive developments on the prices front in recent weeks may help to ease the acute price pressures to some extent, the RBI governor noted.

These would include expectations of a normal south-west monsoon and kharif agricultural season; the recent supply-side measures taken by the government and the unfolding of their impact; lifting of the palm oil export ban by Indonesia; and signs of moderation in global industrial metal price indices, he said.

“Our quick survey of urban households undertaken after the excise duty cuts on petrol and diesel on May 21, 2022, shows a significant moderation in their inflation expectations: declines of 190 basis points in their three months ahead expectations and 90 basis points in one year ahead expectations. In such a scenario, further reduction of State VATs on petrol and diesel across the country can certainly contribute to softening of the inflationary pressures as well as expectations,” Das said.

“Experience teaches us that preserving price stability is the best guarantee to ensure lasting growth and prosperity. Our actions today will impart further credibility to our medium-term inflation target, which is the central tenet of a flexible inflation targeting framework,” the RBI Governor said after the Monetary Policy Committee meeting.

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