ECONOMY

The RBI Insists Inflation Is Transitory. Is It?

Revision Imminent?

CPI inflation rose by 5.5% in the April-June 2021 quarter, compared to the central bank’s estimate of 5.2%. As such, economists expect a revision in forecast in the upcoming policy meet scheduled for early-August.

The RBI will have to increase its FY22 CPI inflation forecast higher from the current 5.1%, to adjust for the range shift that has occurred to CPI, said CARE Ratings. “Going ahead we expect inflation to be around 6% for the next couple of months,” it added.

As such, the ratings agency now forecasts CPI inflation to average about 5.6% in FY22, with July-September 2021 average inflation at 5.8% compared to the RBI forecast of 5.4%. Core CPI inflation is likely to average close to 6% in FY22 compared to 5.3% in FY21, according to its estimates.

However, this may yet not have a bearing on MPC at least at its next meet, as there is a commitment to focus more on growth, CARE Ratings said.

Despite the revision, inflation is still on a downward glide path when compared to average inflation of 6.2% in FY21, said Sameer Narang, chief economist at the Bank of Baroda. But, risks remain to the upside, he said.

Food inflation continues to remain high, the southwest monsoon has gone into a lull and international oil prices continue to rise, said Narang.

The RBI expects inflation to taper simply because of the base effect, said Sunil Kumar Sinha, principal economist at India Ratings & Research. Ideally, inflation should be close to 4%. Even if it does not come back to that and is instead between 5-5.5%. within the RBI’s target band, it still helps the central bank manage it’s monetary policy stance, said Sinha.

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