NEW DELHI: The Reserve Bank of India (RBI) has projected inflation of 6.7% for the financial year 2023, 100 basis points more than what it had predicted earlier. However, experts are divided on the RBI’s inflation forecast.
While some opine that the apex bank has been consistently underestimating the inflation risk, others think RBI’s forecast may be true amid uncertainties on the global front. According to Nomura, RBI has been consistently underestimating inflation risks for the past 18 months.
It said the inflation may touch 7.2% in the current fiscal due to higher food, fuel and input prices. It expects RBI to revise its inflation forecast again in August. “Despite the government’s actions on cutting the fuel excise duty, we see higher inflationary pressures from rising food price inflation, a pending rise in electricity tariffs, the continued passage of higher input costs from firms to consumers and other second-round effects (house rents, wages, minimum support price hikes),” said Nomura.
Meanwhile, Suyash Chaudhary, head, fixed income, ID FC Mutual Fund, said RBI’s Consumer Price Inflation (CPI) forecast for H1 FY23 is higher than their forecast and for H2 it is lower. “The market may not have any reason to question RBI’s near term forecasts given that it seems to be accounting for most of the known inflationary pressures over H1. H2 is too far in the future and therefore subject to that much more forecasting uncertainties,” Chaudhary said, adding that after an extraordinarily large commodity price shock as being witnessed now, the pace of unwind ahead will be that much harder to model for.
In addition, Lekha S Chakraborty, Professor at the National Institute of Public Finance and Policy said, "Projections are based on a dynamic macroeconomic scenario based on geopolitical uncertainties and risks including the assumption on the price of oil per barrel etc. These projections are dynamic. We cannot take it as static estimates given the energy price volatility and other geopolitical (exogenous) shocks."
"Having said that, I do not want to comment on the technical model of the RBI. The big picture is about the efficacy of the inflation targeting framework itself as the new monetary policy framework is failing to anchor “inflationary expectations”," she added.