The Reserve Bank of India's (RBI) inflation forecasts have changed very little despite a big drop in the price of crude oil the central bank assumed in its projection models.
According to the April 6 statement of the Monetary Policy Committee (MPC), Consumer Price Index (CPI) inflation is now seen averaging 5.2 percent in 2023-24, 10 basis points lower than the 5.3 percent projection made by the central bank in February.
One basis point is one-hundredth of a percentage point.
The quarterly break-up of the inflation forecast is as follows:
> April-June 2023 CPI inflation forecast raised to 5.1 percent from 5 percent
> July-September 2023 CPI inflation forecast retained at 5.4 percent
> October-December 2023 CPI inflation forecast retained at 5.4 percent
> January-March 2024 CPI inflation forecast lowered to 5.2 percent from 5.6 percent
The minor change in the full-year inflation forecast as well as that for the first three quarters is despite the RBI assuming the crude price to fall to $85 a barrel from $95 a barrel.
Economists noted back in February that the $95 a barrel price for India's crude oil basket assumed by the RBI was on the higher side. Governor Shaktikanta Das had then gone on to admit that the inflation forecast for the next financial year was conservative and low crude oil prices could work in India's favour.
The average price of India's crude oil basket in March was $78.54 a barrel, down from $82.28 in February, according to data from the government's Petroleum Planning & Analysis Cell.
RBI deputy governor Michael Patra admitted in the post-policy press conference that the revisions were larger for the second half of 2023-24.
"That you can directly link with what is happening right now. There is going to be a base effect at play – because of high inflation now, you will get a favourable impact then. That is what has changed between February and today because we got a print in between," Patra said.
However, uncertainty remains as far as crude oil prices are concerned.
"A stronger rebound in global demand, production cuts by OPEC (Organization of the Petroleum Exporting Countries) plus countries and the escalation of geopolitical hostilities could push crude oil prices higher," the RBI's Monetary Policy Report, also released on April 6, noted.
On April 2, the OPEC+ nations announced they would cut oil output by around 1.16 million barrels a day.
While the crude oil price asumed by the RBI in its forecasts has reduced, some of the other variables underpinning the projections have deteriorated.
As per the six-monthly Monetary Policy Report, there have been changes to some of the other key assumptions which help in arriving at the inflation forecast. These are as follows:
| Apr 2023 assumption | Sep 2022 assumption | |
| Crude oil price | $85 per barrel in FY24 | $105 per barrel in H2 FY23 |
| Exchange rate | 82 per dollar | 80 per dollar |
| Monsoon | Normal for FY24 | 6% above normal for FY23 |
| Global growth | 2.9% in 20233.1% in 2024 | 3.2% in 20222.9% in 2023 |
| Fiscal deficit | To remain within FY24 Budget estimates | To remain within FY23 Budget estimates |
| Domestic macroeconomic/structural policies during forecast period | No major change | No major change |
"...the nominal exchange rate of the Indian rupee or INR moved in a range of 81-83 per US dollar in H2 (of 2023-24)," the report said.
"The INR was supported by a correction in the US dollar while risk-off sentiments towards emerging market economies (EME) assets and a widening current account deficit exerted downward pressures on the currency. Taking these developments into consideration, the exchange rate is assumed at 82 per US dollar in the baseline as against 80 in the September 2022 Monetary Policy Report," it added.
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