Monetary policy: RBI retains retail inflation forecast at 6.7% for FY23

RBI Governor Shaktikanta Das. (File photo)

The Reserve Bank of India (RBI) on August 5 retained its retail inflation forecast for the current financial year at 6.7 percent.

In its earlier policy review in June, the central bank had forecast Consumer Price Index (CPI) inflation would average 6.7 percent in 2022-23.

In its monetary policy decision today, the central bank increased the policy repo interest rate - the rate at which it lends short-term money to banks - by 50 basis points to 5.4 percent.

"Headline inflation has recently flattened and the supply outlook is improving, helped by some easing of global supply constraints. The MPC, however, noted that inflation is projected to remain above the upper tolerance level of 6 percent through the first three quarters of 2022-23, entailing the risk of destabilising inflation expectations and triggering second round effects," the committee noted in its statement.

While inflation declined marginally in June to 7.01 percent from 7.04 percent in May, CPI inflation has been above the medium-term target of 4 percent for 33 consecutive months. It has also been above the 6 percent upper bound of the RBI's 2-6 percent tolerance range for two consecutive quarters. As such, another quarter of 6-percent plus inflation would see the central bank fail to meet its inflation mandate.

As per the RBI's latest forecast, it remains on track to fail, with CPI inflation seen averaging 7.1 percent in July-September. After that inflation is seen easing sharply to 6.4 percent in October-December and 5.8 percent in the first quarter of 2023.

In the second quarter of the next calendar year, CPI inflation is seen falling further to 5.0 percent.

The RBI's inflation forecast assume that the price of India's crude oil basket will average $105 per barrel.

The price of India's crude oil basket averaged $105 per barrel in July, as per data from the Petroleum Planning & Analysis Cell.

While the RBI's forecast predict a steady decline in inflation over the next 12 months, the MPC watned that "spillovers from geopolitical shocks are imparting considerable uncertainty to the inflation trajectory" - both upside and downside risks.

While the downside risks to inflation include easing food, metal, and crude oil prices, upside risks are present in the form of supply concerns and a strengthening dollar, which can led to imported inflation pressures.

The MPC said risks to the inflation forecast were "evenly balanced".