On June 8, Reserve Bank's (RBI) governor Shaktikanta Das admitted that the retail inflation will remain above the RBI's tolerance level of 6 percent in FY23.
RBI raised the retail inflation, or the CPI inflation, forecast for FY23 by 100 bps to 6.7 percent from 5.7 percent, with April-June inflation forecast revised to 7.5 percent from 6.3 percent, July-September forecast revised to 7.4 percent from 5.8 percent, October-December revised to 6.2 percent from 5.4 percent and January-March 2023 inflation forecast revised to 5.8 percent from 5.1 percent.
The inflation is expected to remain high owing to rising crude oil and other commodity prices, domestic producers passing on input prices to consumers, and an upward revision in electricity prices and animal fodder. Analysts believe the upward revision to the inflation estimate was warranted amid a steady increase in food and oil prices.
This was the second consecutive increase in expected inflation from the RBI and yet, the RBI may go wrong in its inflation projection for FY23 thanks to the evolving geopolitical situations.
Just take a look at the crude oil prices. Brent Crude is trading near the $125 a barrel mark. A prolonged war can push the crude price to a much higher level which can shoot up India's inflation.
Nevertheless, many experts find the RBI's inflation projection pragmatic and realistic at the current juncture even as the sharp rise in crude oil prices remains an overhang.
Suvodeep Rakshit, Senior Economist, Kotak Institutional Equities is of the view that RBI’s inflation estimate for FY23 looks realistic at 6.7 percent.
"The underlying crude price assumption is $105/bbl. Obviously, the risk to the estimates will be from higher crude prices, global commodity prices remaining elevated or moving higher, and the degree of pass-through from input prices into final prices. Given the level of geopolitical uncertainty and flux in commodity prices, inflation uncertainty will continue with risks skewed on the upside," said Rakshit.
VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services said RBI's inflation projection of 6.7 percent for FY23 is realistic as the RBI Governor mentioned while declaring the policy 75 percent of the increase in inflation is due to the rise in prices of food items.
"The government's supply side initiatives like banning wheat exports, putting curbs on sugar exports and recent improvement in edible oil imports can restrain food price rise. India's rice stock is four times and wheat stock 1.8 times buffer requirements. So, there is comfort on the grain front. Vegetable price inflation is seasonal and can come down," Vijayakumar observed.
However, Vijayakumar added since the WPI inflation is high at 15.08 percent there is a danger of spill over to CPI inflation. If the restrictions imposed by EU on Russian oil starts biting, there is a risk of crude shooting above $130 or even $140 and remaining at elevated levels for long. If such a scenario unfolds, inflation can overshoot RBI's projections.
Nishit Master, Portfolio Manager, Axis Securities also expects the inflation print to be closer to RBI’s average estimate of 6.7 percent in FY23 but he expects the quarterly trend to be different from RBI’s projection with the near term being higher than RBI forecast, while Q3 and Q4 inflation numbers might be lower than estimated on back of an expected global slowdown in demand.
And he also believes there are certain scenarios where the inflation would be pushed even higher than estimated.
"Some of these scenarios are significant rupee depreciation, further increase in crude prices beyond $130 per barrel, an increase in supply chain bottlenecks either due to a revived wave of infections in China or extended war in Europe, and a significant increase in wages, leading to higher cost of production," said Master.
Yash Gupta, an equity research analyst at Angel One believes that inflation may be near the RBI's estimates for FY23 as we see some softening in the commodity market.
"The key thing to watch for FY23 inflation is the crude oil price. RBI's 6.7 percent expected inflation is based on the crude prices of $105 and currently it is trading at $120 so any surprise in the inflation number can come from the oil. Every $10 increase in crude price will impact inflation by 50-75 bps. Along with that, any export ban from the palm oil exporting countries can also push inflation on the higher side," said Gupta.
Disclaimer: The views and recommendations made above are those of individual analysts and not of MintGenie.