However, the bigger challenge for MPC is the inflation trajectory. RBI has raised its inflation forecast for Q2 and Q3 by 0.2 per cent and 0.1 per cent respectively to 5.2 per cent and 4.4 per cent respectively. With this, RBI is projecting inflation at 5 per cent in FY22, which is a full 1 per cent higher than RBI’s target of 4 per cent. In fact, RBI’s projection for FY23, which is released in the Monetary Policy Report is 4.7 per cent. During FY21 (the year gone by), inflation came in at 6.2 per cent. Thus, for three consecutive years inflation is likely to be higher than RBI’s target. As against this, inflation in the previous four years (FY17-20) was close to target.
The upward momentum in inflation has emerged from rising global commodity prices. In Oct’20, oil prices were hovering around US$ 38/bbl and are now at US$ 63/bbl. Similarly, global agriculture prices have increased by 21 per cent over the last six months. Commodity prices as measured by the CRB index have increased by 24 per cent. Higher inflation is thus essentially a supply side phenomena driven by rising global demand. Even domestic demand is fast expanding as seen in rising imports.
In the current policy, MPC has managed to open up room for normalisation of monetary policy by withdrawing time contingent guidance to one pivoted on growth without disrupting the markets. Few EM central banks have already increased policy rates before the US monetary policy cycle turns. RBI may look at compressing the rate corridor (difference between repo and reverse repo rate) this year before raising repo rate next year.
Business Standard has always strived hard to provide up-to-date information and commentary on developments that are of interest to you and have wider political and economic implications for the country and the world. Your encouragement and constant feedback on how to improve our offering have only made our resolve and commitment to these ideals stronger. Even during these difficult times arising out of Covid-19, we continue to remain committed to keeping you informed and updated with credible news, authoritative views and incisive commentary on topical issues of relevance.
We, however, have a request.
As we battle the economic impact of the pandemic, we need your support even more, so that we can continue to offer you more quality content. Our subscription model has seen an encouraging response from many of you, who have subscribed to our online content. More subscription to our online content can only help us achieve the goals of offering you even better and more relevant content. We believe in free, fair and credible journalism. Your support through more subscriptions can help us practise the journalism to which we are committed.
Support quality journalism and subscribe to Business Standard.