RBI stands by its 'robust' CPI inflation forecast, says Shaktikanta Das

The RBI had at its policy review meeting on February 10 said it expects Consumer Price Index (CPI) inflation to average 4.5 percent in FY23, down from 5.3 percent this financial year.

However, not many are convinced by the forecast, with several economists saying that the central bank is underestimating the extent to which price pressures will be present next year.

As per the RBI's survey of professional forecasters, CPI inflation is seen averaging 5.0 percent in FY23. Questions have been raised in particular about the price of crude oil assumed by the RBI in its forecast.

As per the Monetary Policy Report released in October 2021, the RBI had assumed $75 a barrel as the price of India's crude oil basket for the second half of FY22. However, oil prices have been climbing and hit multi-year highs, with March 2022 crude oil futures reaching as high as $94.66 a barrel on February 11.

The RBI only discloses the assumptions underpinning its inflation forecasts in its six-monthly Monetary Policy Report, which will be next released in April 2022.

"When you do an inflation projection, you assume a certain crude price for the whole year. A particular price, and of course, a range of prices. Today morning crude has touched $95 (per barrel). If you make a projection based on that for 365 days, you will definitely go wrong because it (crude prices) may go up further or come down steeply.

“So, therefore, based on several factors, we take into account a particular range within which crude prices are expected to fluctuate, considering all the factors that can be anticipated and that can be foreseen as of today," Das said.

Price stability was definitely uppermost on their mind, the RBI governor said.

Despite CPI inflation staying above the RBI's medium-term target of 4 percent for 27 consecutive months, the Monetary Policy Committee (MPC) kept the policy repo rate unchanged.

In its latest decision, made on February 10, the committee left the repo rate unchanged at a record low of 4 percent while retained its so-called accommodative stance.

Commenting on the impact other central banks' policy changes may have on India, Das said the economy was "well placed" to handle any disturbances.

"The quantum of forex which we hold in the forward market, if you add that (to RBI's foreign exchange reserves), I think India is well-placed to deal with global spillovers," Das said.

Rapid increase in US inflation to a 40-year high has sparked fears of the US Federal Reserve increasing interest rates even before its next scheduled monetary policy meeting.

While this has had hurt market sentiment across the world, Das expressed confidence there wouldn't be a repeat of the 'taper tantrums' of 2013.

"This time I don't think there will be a tantrum because the US Federal Reserve is fully conscious of what happened in 2013 and they have been giving sufficient advanced guidance. Now whether there will be three rate hikes or four rate hikes or five rate hikes, it's anybody's guess," Das said.