RBI on knife-edge as retail inflation projections flare up close to 6%

The RBI has revised its retail inflation or consumer price index (CPI) projection upward from 5.2 per cent to 5.7 per cent in 2021-22 , which is close to the 6 per cent upper limit set by the government for the six members monetary policy committee.   The inflation is projected to move from 5.4 per cent to 5.9 per cent in the second quarter, 4.7 per cent to 5.3 per cent in the third quarter, and 5.3 per cent to 5.8 per cent in the fourth quarter of 2021-22.   Clearly, the higher inflation forecast makes it clear that the interest rates are going to rise sooner than later.   One of the six monetary policy committee (MPC) members voted for change in the accommodative stance as the decision to keep the repo rate unchanged at 4 per cent was five to one.   The RBI has been maintaining the repo rate at 4 per cent for the last year to support the industry as well as households and also support the overall recovery in the economy.    "Crude oil prices are volatile with implications for imported cost pressures on inflation. The combination of elevated prices of industrial raw materials, high pump prices of petrol and diesel with their second-round effects and logistics costs continue to impinge adversely on cost conditions for manufacturing and services, although weak demand conditions are tempering the pass-through to output prices and core inflation," said the RBI Governor Shaktikanta Das.   The retail inflation already crossed the RBI's upper band of 6 per cent for the two months of May and June this year. CPI shot up to 6.30 per cent in May and 6.26 per cent in June.   RBI ‘s mandate is to keep inflation at 4 per cent with a band of 2-6 per cent.   The RBI is still maintaining that inflation is transitory and a temporary phenomenon.   The governor said that while several steps have been taken to ease supply constraints, more needs to be done to restore supply-demand balance in a number of sectors of the economy. "The recent inflationary pressures are evoking concerns, but the current assessment is that these pressures are transitory and largely driven by adverse supply-side factors," said the Governor.   There is now little room left for the RBI to accommodate the low-interest rates as inflation is now in dangerous territory.   The Central Bank now needs support from the government in reducing cess and excise duties to soften the input cost pressures coming from petrol and diesel prices. The rising crude oil is fuelling the inflationary pressure in the economy as the prices have jumped from a low of USD$20 a barrel to USD $70 barrel, which has pushed the domestic petrol prices to over Rs 100 per litre. The food prices are also on the rise because the cost pressures in food and other items are coming from the logistics or transportation costs.

Also read: RBI ups FY22 CPI inflation outlook to 5.7% Also read: MPC meet: RBI retains GDP projection at 9.5% for FY22