MUMBAI: Indian economy is likely to face less inflationary pressures in the next financial year compared to the current financial year. The Economic Survey expects inflation to pose fewer challenges in the financial year 2023-24.
"Overall, the inflation challenge in FY24 must be a lot less stiff than it has been this year. We expect monetary and fiscal authorities to be as proactive and vigilant as they have been this year," said the Economic Survey 2022-23.
Reserve Bank of India's Monetary Policy Committee (MPC) increased the policy repo rate under the liquidity adjustment facility (LAF) by 2.25 per cent (225 basis points) from 4.0 per cent to 6.25 per cent between May and December 2022.
"It is not wishful thinking that 2023 will show less macroeconomic volatility than its preceding financial year. Both CPI-C and WPI have fallen below 6 per cent (which is the RBI tolerance limit for the former) and are on the descending slope of the surge that hit the economy in the first half of the current fiscal," said the survey.
RBI projects CPI inflation for Q1 - FY24 at 5.0 per cent and for Q2 -FY24 at 5.4 per cent on the assumption of a normal monsoon. Inflationary expectations are decisive in charting the course of inflation.
The one-year-ahead inflationary expectations by businesses have shown a decreasing trend in the current fiscal. As businesses are price-setters, their perceptions of inflation are significant in making sense of whether costs would be passed on, resulting in higher prices in the near future.
Similarly, inflationary expectations by households- who are the price takers of the economy- determine their consumption choices in the near future. Much like businesses, household inflation expectations too have moderated.
However, there are risks which may push up the prices. RBI forecasts elevated domestic prices for cereals and spices in the near term owing to supply shortages. Milk prices are also expected to spike reflecting high feed costs.
"In general, climate across the world has become increasingly erratic, further fortifying upside risks to food prices. A lot depends on industrial input prices: they may ease, but on the flip side their delayed pass-through to consumer prices may contribute to the stickiness of core inflation," noted the survey.
In FY23, retail inflation was mainly driven by higher food inflation, while core inflation stayed at a moderate level. Food inflation ranged between 4.2 per cent to 8.6 per cent between April and December 2022, while the core inflation rate stayed at around 6 per cent except in April 2022.
The wholesale inflation rate climbed to about 13 per cent in FY22. Prices of items like petroleum products, basic metals, chemicals & chemical products, and edible oils, with maximum exposure to international pricing translated into a rise in the domestic WPI inflation.