Inflation seen staying above 4% in FY23, to average 5.2% in FY24: RBI

The Reserve Bank of India’s (RBI’s) structural models indicate average consumer price index (CPI) inflation at 5.2 per cent in the next fiscal year, lower than its forecast of 6.7 per cent for FY23 but above the target of 4 per cent.

“In Q4FY24, CPI inflation is projected at 5.2 per cent, with the 50 per cent and the 70 per cent confidence intervals at 3.5-7 per cent and 2.5-7.9 per cent, respectively,” the RBI said in its September 2022 Monetary Policy Report.

There may not be any respite from high and stubborn inflation any time soon as the RBI is expecting it to come down to 4 per cent over the next two years.

“I have said earlier we are expecting to come down closer to the target [4 per cent CPI inflation] over a two-year cycle. That is our expectation even now. But there are so many uncertainties they are playing from time to time,” RBI Governor Shaktikanta Das said during the post-policy interaction on Friday.

The RBI increased the policy repo rate by 50 basis points to 5.9 per cent.

According to the RBI Act, the Monetary Policy Committee has a 4 per cent inflation target, with a variation of 2 per cent on either side. It is seen as a failure of the RBI if average inflation stays beyond the 2-6 per cent range for three consecutive quarters. CPI inflation for the January-March and April-June was over 6 per cent and the July-September quarters is not likely to be an exception.

If the RBI fails to meet its inflation mandate, it has to write a letter to the government explaining the reasons for its failure and steps that would be taken to correct the situation. In addition, the RBI has to mention the timeframe it will need to bring back inflation to 4 per cent.

“It’s a privileged communication between the RBI and the government. So at this point of time we cannot say whether it will be made public. from our side we will not make it public because it is a privileged communication,” Das said when asked if the RBI’s responses to the government will be made public.

Assuming average crude oil price (Indian basket) of $100 per barrel, the RBI retained its inflation projection 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. CPI inflation for Q1:2023-24 is projected at 5.0 per cent.

For 2023-24, the RBI’s structural model estimates indicate real GDP growth at 6.5 per cent, lower than the 7 per cent forecast for the current financial year.

The assumption of 5.2 per cent average CPI inflation for the next financial year depends on a normal monsoon, normalisation of supply chains and no policy shocks, the RBI said.

While the MPC provided inflation forecasts till the first quarter of the next financial year in its statement, the longer-term estimates are provided in the monetary policy report.

CPI inflation is projected to average 6.7 per cent in 2022-23, 7.1 per cent in July-September, 6.5 per cent in October-December and 5.8 per cent in January-March, with risks evenly balanced. The price gauge is seen at 5 per cent in April-June 2023.