As prices of crude and other commodities trend upwards and inflation prints remain above the monetary policy committee’s (MPC) tolerance level, the central bank’s rate-setting panel may have to raise its inflation projection substantially. Economists that FE spoke to see the inflation forecast of 4.5% for FY23 being raised by anywhere in the range of 20-100 basis points (bps) during the April policy review.

The government has raised prices of petrol and diesel earlier this week and in the absence of a cut in excise duties, consumer prices in India may trend further up. Consumer price index (CPI) inflation rose to 6.07% in February 2022 from 6.01% in January. Under the circumstances, economists are expecting the MPC to move away from dovishness and start laying the ground for an eventual change in stance, even as they continue to remain supportive of growth. The road to policy normalisation is expected to be a long one and the MPC may make a start by revising its inflation projection.

Analysts at Icra have projected the CPI inflation to average at 5.6% in FY23, well above the MPC’s projection of 4.5%. Aditi Nayar, chief economist at the rating agency, said with crude hitting $115/bbl and a full transmission to retail prices, the CPI inflation could hit 6.3% in Q1FY23, though a cut in duties to pre-pandemic levels could limit the rise to 6.1%. “In both these scenarios, the CPI inflation is projected well above the MPC’s forecast of 4.9% for Q1 FY2023, suggesting that the latter may undergo an appreciable upward revision,” Nayar said.

RBI governor Shaktikanta Das recently hinted that the MPC may need to relook its inflation projections despite categorising the 6%-plus prints as transitory. “I don’t see inflation going up beyond 6%. In fact, our expectation was that it will moderate to 4.5%. Now, when we rework we will know where exactly we stand,” he said.

Soumyajit Niyogi, associate director at India Ratings and Research, said there will certainly be a revision in the inflation target accompanied by an expression of concerns around growth. “Growth-inflation dynamics is turning wobbly, and that requires some action. We expect the policy tone to be more balanced than dovish,” he said. Niyogi expects a 20-30-bps change in the inflation forecast, along with some caveats on the Russia-Ukraine war situation.

Some RBI watchers are of the view that the MPC may not go for a 100-bps change in the inflation forecast as that could spook the markets.

Madhavi Arora, lead economist, Emkay Global Financial Services, said the inflation print for March could be around 6.3-6.4?cause along with crude, prices of other commodities have also risen. At the same time, mandi prices hint at a much lower fall in perishables for the month. “They may have to raise their inflation forecast substantially,” she said.