In its first monetary policy announcement for 2022-23, the Reserve Bank of India (RBI) raised its inflation forecast to 5.7 percent, from its previous estimate of 4.5 percent.
The RBI has revised its inflation projections upwards and sharply lowered its economic growth forecasts for the current fiscal year amid heightened geopolitical tensions since late February, posing downside risk to domestic growth and upside risk to inflation projections.
The Monetary Policy Committee (MPC), led by RBI Governor Shaktikanta Das, held its first meeting of the current fiscal year a few days ago.
However, the RBI’s MPC kept repo interest rates unchanged at the current 4 percent level.
With the RBI raising the country’s retail inflation projection and keeping the repo rate unchanged, Kotak Mahindra Bank CEO Uday Kotak expressed concern and questioned the decisions.
He tweeted: “Sharp increase in inflation estimate to 5.7%, from 4.5% assuming $100 oil. Exit Q4 fy23 estimate 5.1%. Present Repo rate at 4%. If India should move to 0% real interest rate, ie inflation – interest rate = 0, then we need an interest rate increase of 1% 4 rate increases of a quarter each?
Rbi Policy: Sharp rise in inflation estimate to 5.7% from 4.5% assuming $100 oil. Exit Q4 fy23 estimated 5.1%. Present Repo rate at 4%. If India has to move to a 0% real interest rate i.e. inflation – interest rate = 0, we need a 1% interest rate hike. 4 rate increases of a quarter each?
— Uday Kotak (@udaykotak) Apr 10, 2022
The RBI governor stated that inflation was expected to be 5.7 percent in 2022-23, with Q1 at 6.3 percent, Q2 at 5.8 percent, Q3 at 5.4 percent and Q4 at 5.1 percent.
The governor stated that these estimates were based on the fact that crude oil prices would remain high, averaging around $100 a barrel in FY 22-23 as a result of ongoing geopolitical tensions.
It is clear that inflation, rather than growth, appears to be the main concern of the RBI. As the COVID crisis appeared to be ending, production started to ramp up and supply chain concerns were gradually allayed.
The RBI could therefore have expected inflation to fall. But the Russian invasion of Ukraine has changed the situation. Supply chain concerns have resurfaced and the supply of critical raw materials has been disrupted.
Russia and Ukraine are major producers of a variety of essential commodities, including crude oil. After the Russian invasion of Ukraine, the prices of these goods rose.
As a result, the RBI predicts that inflation will rise rather than fall. Still, the central bank expects inflation to decline with each quarter of the current fiscal year.
But these stats could rise if the price of crude oil rises and stays above $100 a barrel, or if India gets less rain than forecast.