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RBI Monetary Policy | MPC failure predicted as FY23 inflation forecast raised to 6.7%

RBI policy: While the central bank's inflation forecast for FY23 is 220 basis points higher than what it projected in February, it does not take into account the impact of the 50 bps repo rate hike announced today

June 08, 2022 / 11:31 AM IST
Representative image

Representative image

The Reserve Bank of India (RBI) has raised its inflation forecast for FY23 by 100 basis points to 6.7 percent, with the quarterly projections predicting the Monetary Policy Committee (MPC) will fail to meet its mandate.

According to the latest forecasts released on June 8, the central bank now sees Consumer Price Index (CPI) inflation averaging 7.5 percent in April-June, 7.4 percent in July-September, 6.2 percent in October-December, and 5.8 percent in the first quarter of 2023.

In April, the RBI had pegged CPI inflation at 6.3 percent for April-June, 5.8 percent for July-September, 5.4 percent for October-December, and 5.1 percent for January-March 2023.

The latest inflation forecasts assume a price of $105 a barrel for India's crude oil basket.

Also read: RBI raises repo rate by 50bps to 4.9% to fight inflation pressure

"Further, the baseline inflation projection of 6.7 percent for FY23 does not take into account the impact of monetary policy actions taken today," RBI Governor Shaktikanta Das said in a statement on June 8.

The MPC voted to raise the repo rate by 50 basis points to 4.90 percent following a 40 bps rate hike on May 4. One basis point is one-hundredth of a percentage point

The sharply higher inflation forecasts come on the back of a surge in retail inflation to a near eight-year high of 7.79 percent in April.

What the revised forecasts also mean is that the RBI expects the MPC to fail to meet its inflation mandate.

Also read: MPC meeting: Key highlights from RBI Governor Shaktikanta Das' speech

The MPC is deemed to have failed when average CPI inflation is outside the 2-6 percent tolerance band for three consecutive quarters. With CPI inflation averaging at 6.3 percent in the first quarter of 2022, the new forecasts say the MPC would have failed when CPI data for September is released in October.

As per law, if the RBI fails to meet the inflation target, it must submit a report to the Centre—commonly referred to as "the letter"—spelling out the reasons for failure, the remedial actions it proposes to take, and an estimate of the time period within which inflation will return to target.

In May, a person close to developments had warned that while the RBI welcomed being held accountable for its monetary policy, it may have to resort to using a "sledgehammer plus sledgehammer" if inflation is to be brought back to mandated levels in a short period of time of around six months.

Also read: Credit cards can now be linked to your UPI, starting with RuPay

"So, accountability should be taken with a pinch of salt and not as something to celebrate. We will all rue the day the RBI writes the letter," the person Moneycontrol on May 12.

Siddharth Upasani
first published: Jun 8, 2022 11:01 am