InvestorQ : What has been the RBI view on inflation and GDP growth in the coming few quarters of FY23 and why has it kept both the estimates static?
Lavanya Subramanian made post

What has been the RBI view on inflation and GDP growth in the coming few quarters of FY23 and why has it kept both the estimates static?

Anamika Sodhani answered.
2 months ago

In its August 2022 policy statement, the Monetary Policy Committee (MPC) held on to its inflation forecast for FY23 at 6.7%. while the CPI inflation has come to 7%, it may look at revising inflation lower only once it falls below 6%, since WPI inflation is already above the 15% mark and putting pressure on the cost push inflation. On one hand Brent Crude has fallen to $94/bbl, while on the other hand the higher current account deficit is weakening the rupee. That is likely to result in a lot of imported inflation for the FY23 fiscal year.

RBI does see some inflation positives. For instance, there are positive cues coming from prices of food, metal and oil; where inflation has tapered globally. There is a concern over shortfall in paddy sowing, but the comfortable buffer stocks should help them sail through without too much impact on prices. As a result, RBI has held full year FY23 inflation at 6.7%. In terms of quarterly break up of inflation for the next four quarters, it is as under viz. Q2FY23 at 7.1%, Q3FY23 at 6.4%, Q4FY23 at 5.8% and Q1FY24 at 5.0%.

However, the RBI has also refrained from making any upwards projectsion to the growth estimates for FY23. GDP growth projections for FY23 have been maintained at 7.2%. Perhaps, once the CPI inflation comes below 6%, the RBI may look to hike the real GDP growth targets for FY22. On growth, RBI is betting heavily on improving rural consumption on the back of strong agricultural growth. on the positive side, the contact intensive sectors like trade, hotels and tourism have shown a sharp turnaround and that sets the story.

But all is not hunky dory on the growth front. For instance, the RBI has cautioned that there could be elevated risks to the GDP growth arising from geopolitical tensions. There is also the risk of global hawkishness as central banks across the developed world rush to tighten policy rates. GDP growth projection for FY23 has been maintained at 7.2% and has been broken up as under: Q1FY23 at 16.2%, Q2FY23 at 6.2%, Q3FY23 at 4.1% and Q4FY23 at 4.0%. Growth is likely to taper in Q3 and Q4, once the base effect starts waning.

One of the key macro goans that the RBI is targeting on a consistent basis is to manage inflation expectations. Inflation is largely a function of inflation expectations and once that is toned down, people are more willing to spend and that props up the consumption spending and growth too. It must be said that in that endeavour, the RBI has been successful as inflation expectations have trended lower. It is important because it is likely to make the RBI’s hawkish policy stance more effective in terms of immediate macro outcomes.