RBI Projects Retail Inflation at 5.1% in FY22

Monsoons, supply-side interventions to keep inflation low; commodity prices and weak demand a worry

RBI Projects Retail Inflation at 5.1% in FY22
RBI Projects Retail Inflation at 5.1% in FY22
PTI - 04 June 2021

Satisfactory progress of the monsoon and effective supply-side interventions by the government should keep retail inflation at 5.1 per cent in the current financial year, said the Reserve Bank of India (RBI) on Friday, adding the projection is well within the Monetary Policy Committee’s target to keep inflation rate at 4 per cent, with an upper or lower tolerance level of 2 per cent.

However, the apex bank its monetary policy review remained cautious about upside risks to inflation from rising global commodity prices, and on a nearly pan-India restriction on activity as a result of a persisting pandemic second wave.

Presenting the second bi-monthly monetary policy review, RBI governor Shaktikanta Das announced that the key repo rate — short-term lending rates to banks — will be kept unchanged at 4 per cent.

The favourable base effects that brought about moderation in headline inflation by 1.2 percentage points in April, may persist through the first half of the year, conditioned by the “progress of the monsoon and effective supply-side interventions by the government”, Das said.

Taking into consideration measures taken so far, as well as the upside risks, Das said CPI (consumer price index) inflation is projected at 5.1 per cent during 2021-22. This consists of 5.2 per cent in the first quarter, 5.4 per cent in the second quarter, 4.7 per cent in the third quarter and 5.3 per cent in the fourth quarter of this fiscal, with risks broadly balanced, he said.

“... insulating prices of essential food items from supply-side disruptions will necessitate active monitoring and preparedness for coordinated, calibrated and timely measures by both Centre and state governments, to prevent emergence of supply-side bottlenecks and increase in retail margins,” the governor said.

Retail inflation came in at 4.3 per cent in April, which has provided some cushion as well as policy-side elbow room, RBI said. CPI retail inflation data for May is awaited in the third week of this month.

RBI said a normal south-west monsoon along with a comfortable buffer stock should help to keep cereal price pressures in check. On the other hand, rising trajectory of international crude oil prices within a broad-based surge in international commodity prices and logistics costs is worsening cost conditions.

“These developments could keep core price pressures elevated, although weak demand conditions may temper the pass-through to consumer inflation,” the RBI governor said in his statement.

RBI said it will take an accommodative stance as long as it is necessary to revive and sustain growth on a durable basis, to mitigate the impact of the pandemic on the economy, while ensuring that inflation remains within the target.

Retail inflation is a key input for RBI to decide on its monetary policy every two months.