Is RBI's FY24 inflation forecast a bit too high?

The RBI sees inflation falling next year - but not as rapidly as others. (File image)

The Reserve Bank of India's (RBI) decision to increase the repo rate by 25 basis points to 6.5 percent on February 8 was along expected lines but its forecast for the next year's inflation caught some off guard.

The central bank, which missed its inflation mandate last year, sees Consumer Price Index (CPI) inflation averaging 5.3 percent in 2023-24, down from its revised forecast of 6.5 percent for this year. The quarterly inflation breakdown is as follows: 5 percent in April-June, 5.4 percent in both July-September and October-December, and 5.6 percent in January-March 2024.

"We think the RBI's forecast for inflation in 2023-24 is aggressive: the underlying oil price projection, while lowered from $100 per barrel, is kept at $95 per barrel, which appears high to us," noted Rahul Bajoria, chief India economist at Barclays.

Oil price assumption

The RBI's assumption of oil prices is indeed high, at least when compared to prevailing levels.

The September 2022 edition of the RBI's Monetary Policy Report had assumed $100 per barrel as the average price of India's crude oil basket for the second half of 2022-23. However, oil prices have been demonstrably lower in the last few months: $91.7 per barrel in October, $87.55 per barrel in November, $78.1 per barrel in December, $80.92 in January 2023, and $80.76 per barrel so far in February, according to data from the government's Petroleum Planning & Analysis Cell.

As such, the forecast assumes oil prices will be roughly 20 percent higher in 2023-24 from current levels. Why?

"...global uncertainty and rise in commodity prices remain a risk going forward. The RBI's inflation projection for 2023-24 seems to be accounting for these uncertainties as they remain on the higher side – especially for April-June," noted HDFC Bank's economists.

HDFC Bank sees CPI inflation averaging 4.7 percent in the first quarter of 2023-24, 30 basis points lower than the RBI's forecast of 5 percent.

However, it is not only the high oil price assumption that has pushed up the RBI's inflation forecast.

Weaker growth

According to Bajoria – who sees CPI inflation averaging 4.7 percent in all of 2023-24 – another source of disinflation next year could be weaker-than-anticipated growth.

The RBI has forecast a GDP growth rate of 6.4 percent for next year, which is slightly lower than the 6.5 percent it had projected in its Monetary Policy Report from September 2022.

"In our view, both, growth and inflation could turn out to be below the RBI's expectations," said Aurodeep Nandi, India Economist at Nomura.

Nomura is more pessimistic than most when it comes to the Indian economy, forecasting a growth rate of just 5.1 percent for the next year due to a recession in developed countries and the lagged impact of tighter monetary policy. But it isn't the only one to see inflation and growth undershooting the RBI's forecasts.

Rajani Sinha, the chief economist at CareEdge, sees inflation averaging 5.1 percent and GDP growth at 6.1 percent in 2023-24.

"With the effect of rate hikes so far playing out in the economy in the months to come, there may not be the need for a further rate hike in the next meeting," Sinha said.

Rating agency CRISIL thinks the numbers may be further lower, pegging India's inflation and growth for next year at 5 percent and 6 percent, respectively.