The Reserve Bank of India (RBI) has put inflation before growth while revising its forecast for both in the current financial year amid the war in Ukraine, the surge in crude oil prices and global supply disruptions.

With the durability of recovery a concern, inflation is back to the centre of the RBI’s policy dashboard.  “This trade-off was underscored by a 60bps cut in the growth projection and a 120bps increase in the inflation forecast, backed by a sharp US$25 per barrel increase in the underlying crude oil price assumption,” said Radhika Rao, senior economist at DBS.

The RBI has revised upwards its inflation forecast to 5.7% this fiscal from its earlier guidance of 4.5%. The GDP growth estimate, on the other hand, is revised downwards to 7.2% from 7.8% before.

“In the sequence of priorities, we have now put inflation before growth. Time is appropriate to prioritise inflation ahead of growth,” RBI Governor Shaktikanta Das said.

Despite hopes for a normal monsoon, food commodities have surged through wheat, edible oil and feedstocks due to geopolitics and supply shocks. The outlook on inflation is also influenced by the rise in crude oil price. The RBI’s assumption of average crude oil price has been revised up to $100 per barrel versus $75pb before.

The March 2022 survey saw median inflationary expectations of urban households, for  three months and one year ahead, increase marginally by 10bps. Separately, the RBI’s industrial outlook survey also reflected manufacturing firms expecting to increase their selling prices in the April-June 22 quarter.   

The RBI expects retail inflation to average 6.3% in the first quarter (April-June 2022); 5.8% in Q2; 5.4% in Q3; and 5.1% Q4 of this fiscal year.

Several economists  expect retail inflation to rise much more that this. Rao expects the March inflation to rise 6.3% year-on-year from 6.1% the month before. “The moderating impact of base effects is likely to be offset by a sequential rise in the food segment alongside the trickle-down impact of higher energy commodity prices as pump prices and LPG have been raised incrementally since late March. Yet, the full impact of the pump fuel and LPG price increases alongside higher natural gas are likely to be reflected from April onwards,” she said. 

There are additional pipeline risks. First, diesel and petrol prices are up 11.5% and 10.5% respectively in early April versus December 2021 (fuel types have a combined weight of 2.3% in the CPI basket). Natural gas has doubled and there has been a 5.5% increase in domestic LPG.

Second, there is a pass-through of higher input costs (logistics and raw material costs) faced by manufacturers. 

Third, other segments like fertilisers, utilities, edible oils and wheat will also exert upside pressure. Cost-push forces account for much of the inflationary push for now, while demand is gradually on the mend. But there are clear signs that inflation is increasingly becoming more persistent and generalised, necessitating an appropriate policy response. 

“CPI is likely to stay elevated at around 6% in April-May, assuming retail fuel increases by another INR 5-7bl, likewise in June-July, with monsoon strength as the other catalyst. We lift the FY23 average to 5.9% yoy with upside risks, vs our previous forecast at 5.4%,” Rao said.