The RBI raised the inflation forecast by 220 basis points in a matter of two months, the sharpest in more than a decade. But it may be a conservative estimate given that its assumption of Crude price at $105 a barrel may have to be raised.

Even as the central bank has retained its growth forecast for FY’23 at 7.2 per cent, it has raised the inflation forecast by 220 basis points to 6.7 per cent for FY’23 above its tolerance band of 2-4 percent. But these estimates factors in only oil prices at $105 per barrel versus $120 dollars per barrel prevailing now. According to analyst estimates, a $10 a barrel change in crude prices could impact CPI inflation by 50-60 bps.

The generalised surge in the international prices of food, energy and industrial items that began around the war in Europe has not abated, according to Dharmakirti Joshi, chief economist at ratings firm

. “This will put pressure on domestic food, fuel and core inflation”, he said.

The RBI governor has stated 75 % of the increase in CPI forecast is due to food items. Global developments on food and commodities prices is expected to play a key role in determining CPI inflation. “We expect the ten-year bond yields to trade in the band of 7.40 %- 7.60 % in the coming months” said Murthy Nagarajan, Head – Fixed Income, Tata Mutual Fund.

Besides, there are several domestic factors that have not been adequately factored in. “There are several upside risks to inflation in the near-to-medium term, from commodity, food, MSP increases, electricity tariff hikes, services sector and pending pass-through from WPI inflation” said Kaushik Das, chief India economist at Deutsche Bank. “Therefore, it is possible that FY’23 CPI inflation can end up being higher, even after RBI’s steep upward revision”.

The Reserve Bank seems to prefer to tread cautiously. “Monetary policy measures take six to eight months to fully play” said governor Shaktikanta Das at the post policy press conference in Mumbai. “We will watch the situation. We can’t provide any guidance as the situation is very uncertain”

The RBI expects inflation to average above the 6% upper tolerance level for the first three quarters of FY23. “We believe inflation could be even stickier, averaging north of 6% for all the 4 quarters of the year” said Pranjul Bhandari, chief India economist, HSBC. “We agree that growth momentum is strong currently, led by a wave of pent-up demand; but may slow in 2HFY23 as the wave runs its course and urban inflation rises, hurting purchasing power”.

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