RBI revises inflation projection upwards: What changed in 2 months?–business today

Clipped from: https://www.businesstoday.in/current/economy-politics/rbi-revises-inflation-projection-upwards-what-changed-in-2-months/story/435943.html

While the RBI has kept the repo rate unchanged, hinting at short-term interest rates to remain low, the risk from ultra-loose monetary policy is certainly on the rise as the future inflation trajectory has an upward bias

The Reserve Bank of India (RBI) has upped its  projection for retail inflation or the consumer price index (CPI) to around 5.0 percent in 2021-22. While the RBI has kept the repo rate unchanged, hinting at short-term interest rates to remain low, the risk from ultra-loose monetary policy is certainly on the rise as the future inflation trajectory has an upward bias.  

Two months ago, the RBI had projected CPI of 5.2 to 5 per cent in the first half (April  to September) of 2021-22. The new forecast takes a higher figure of 5.2 per cent in the entire first half. This indicates the hardening of inflation in the economy.

Similarly, the RBI’s third-quarter projection has been increased from 4.3 per cent earlier to 4.4 per cent. The RBI has also released its estimate for fourth-quarter (January-March), which is at a higher level of 5.1 per cent. The changed scenario of Covid second wave in India and a third wave in some countries has triggered the risk of rising inflation. Surplus liquidity both in domestic and global markets will show up in inflation numbers.

The retail inflation or consumer price index (CPI) is currently at 5.03 per cent for February, which is more than the RBI’s mandated 4 per cent with a tolerance of  2 to 6  per cent. The government has also decided to continue with 4 per cent inflation targeting for the next five years. Meanwhile, the wholesale inflation index (WPI) has also doubled from 2.26 per cent in January to 4.17 per cent in February. The impact of WPI will get reflected in CPI with a lag effect.

So what has changed in the last two months that forced RBI to revise its inflation projections upwards?

HIGHER FOOD INFLATION

Within an overall food inflation print of 4.3 per cent in February, five out of twelve food sub-groups recorded double-digit inflation. In fact, the RBI had earlier estimated lower food inflation. Currently, food has a large share in the CPI basket.

HIGHER INTERNATIONAL COMMODITY PRICES, LOGISTIC COSTS

The mitigation of price pressures on key food items such as protein-based components and edible oils would also depend on supply-side measures and the easing of international prices. The MPC  noted underlying inflation pressure emanates from higher international commodity prices and logistics costs. The RBI has noted that the impact of high international commodity prices and increased logistics costs are being felt across manufacturing and services.

RISE IN CRUDE PRICES

The sudden rise in crude prices is also contributing to inflationary pressure. In the last six months, crude oil prices have jumped from $40 a barrel to a high $70 per barrel. The prices are currently hovering around $65 a barrel. Centre and States can mitigate domestic input costs (taxes on petrol and diesel and high retail margins) amid imported inflation from global commodity prices.

COVID SECOND WAVE

The RBI has said that the renewed jump in COVID-19 infections in certain parts of the country and the associated localised lockdowns could dampen the demand for contact-intensive services, restrain growth impulses and prolong the return to normalcy. In such an environment, continued policy support remains necessary.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s