The Reserve Bank of India (RBI) has now joined battle by pitching the need to ‘keep inflation and inflationary expectations under check’ front and centre of its policy approach. Just over a month after the RBI’s Monetary Policy Committee (MPC) decided at a surprise ‘off-cycle’ meeting to raise interest rates for the first time in almost four years, the rate setting panel has followed up with a further 50 basis points increase in the policy repo rate. Simultaneously, the MPC has made it clear it no longer intends to ‘remain accommodative’. It will instead stay focused on the withdrawal of the pandemic-triggered accommodation as it races to tame retail inflation and anchor it within the 2%-6% target band. In acknowledgment of the herculean task it faces, the MPC now projects retail inflation to average 6.7% over the entire fiscal year ending in March — a full one percentage point increase from the 5.7% it forecast in April. Price gains are now expected to accelerate at a 7.5% pace in the April-June quarter, a sizeable 120 basis points faster than previously estimated, before printing at 7.4% in Q2, a sharp 160 basis points quicker than April’s projection of 5.8%. The headline CPI-based inflation is now seen stuck above the RBI’s upper tolerance limit in Q3 as well, at 6.2%, before easing to 5.8% in the fourth quarter. The MPC has listed a slew of factors clouding the inflation outlook: the war in Ukraine and the consequent elevated commodity prices, the heat wave stunting rabi crop output, high edible oil prices, crude prices that continue to pose a pass-through risk to domestic pump prices of fuels, increases in electricity tariffs, and, crucially, manufacturing and services firms flagging input and output price pressures.
That inflation looms large over every other aspect of the outlook for the economy worldwide is also evident from the MPC’s pointed reference to ‘growing stagflation concerns’ that are amplifying the volatility in global financial markets. While the RBI has made brave to retain its April forecast for GDP growth in the current fiscal at 7.2%, citing an ongoing recovery including in contact-intensive services and an expected boost to rural consumption from rain-spurred kharif sowing and output, a 37% ‘below normal’ start to the southwest monsoon serves as an early cautionary augury. And it is precisely the “headwinds from accelerating inflation” and the resultant ‘erosion of purchasing power of consumers’ that the World Bank cited on Tuesday when it cut its forecast for India’s GDP growth for this year by 50 basis points to 7.5%. The only silver lining is the RBI’s finding in a quick survey, post the May 21 excise duty cuts on petrol and diesel, that show urban households’ three-months-ahead inflation expectations have moderated by 190 basis points. Governor Shaktikanta Das has cited this finding to underline that States too could do their bit to soften inflationary pressures by further reducing their value-added taxes on fuels.
