Inflation conundrum: How RBI’s commentary changed in 2022

Closer to the target

In February, the MPC said that inflation would moderate in the first half of fiscal year 2022-2023, and move closer to the target rate thereafter. This would allow it to remain accommodative, the MPC said.

“The MPC notes that inflation is likely to moderate in H12022-2023 and move closer to the target rate thereafter, providing room to remain accommodative,” the RBI had said in a February policy document.

But the reality was different. the inflation remained above the RBI’s upper tolerance band, hitting 6.95 percent in March, 7.79 percent in April, and 7.04 percent in May.

On the food inflation front too, the central bank was rather optimistic in February, when it mentioned that softening in the prices of pulses and edible oils was likely to continue in response to strong supply-side interventions by the government and increase in domestic production.

"The prospects of a good Rabi harvest adds to the optimism on the food price front. An adverse base effect, however, is likely to prevent a substantial easing of food inflation in January," the February statement had added.

Also read: Is November CPI inflation at 5.88% a game changer on RBI rate hikes?

A likely threat

However, in May they said that global commodity price dynamics were driving the path of food inflation in India. This forced the RBI to change its predictions in June by saying that "inflation is likely to remain above the upper tolerance level of 6 percent through the first three quarters of 2022-2023".

The MPC added that continuing shocks to food inflation could sustain pressures on headline inflation. The central bank said the inflation trajectory would depend on the evolving geopolitical situation and its impact on global commodity prices and logistics.

“The tense global geopolitical situation and the consequent elevated commodity prices impart considerable uncertainty to the domestic inflation outlook,” the RBI had said in June.

Similar statements were made in September too.

Then, the RBI had said, “High and protracted uncertainty surrounding the course of geopolitical conditions weighs heavily on the inflation outlook.”

Also read: Core inflation may average 6.2-6.3% in FY23 despite CPI fall in November, say experts

Hover around the upper band

Following a similar drop in October, in November the headline inflation fell to an 11-month low of 5.88 percent from 6.77 percent in October. This was the first time in 2022 that inflation had fallen below the 6 percent upper limit of RBI’s 4 +/- 2 percent tolerance band.

But in December, after the inflation had remained above the upper tolerance band for straight 10 months, the central bank said that headline inflation was expected to remain above or close to the upper threshold in Q3 and Q4 2022-2023. It was likely to moderate in H1 2023-2024, but would still remain well above the target.

"Unabating geopolitical tensions continue to impart uncertainty to the food and energy prices outlook. The correction in industrial input prices and supply chain pressures, if sustained, could help ease pressures on output prices; but the pending pass-through of input costs could keep core inflation firm," the December policy statement said.

RBI Governor Shaktikanta Das said the main risk was that core inflation (CPI, excluding food and fuel) remained sticky and elevated. Overall, the CPI price momentum remains high. Risks from adverse weather events add to the uncertainty in the outlook.

"Pressure points from high and sticky core inflation and exposure of food inflation to international factors and weather-related events do remain," the Governor had said in a  statement this December.

What next? The RBI expects inflation to ease further in the first quarter of the financial year 2023-2024. Will it once again get it wrong? Will Covid strike again? The answer is in the wind.