Finance Minister Nirmala Sitharaman on Tuesday said that inflation in India has not breached the inflation target ‘so badly’ even as the country reels from surging prices amid global challenges like geopolitical strifes and supply chain disruptions.

“There are global challenges, whether it is the crude price whether it is the prices of commodities which have gone skyrocketing. These will have an impact on all economies,” the union finance minister said at an event in Washington DC. “Even with this said, India’s inflation today is at 6.9% last month. Our tolerance band is only 4%, plus or minus 2%. So we could go up to 6%. We have breached the 6%, but we have not really breached it so badly,” she added.

National Statistical Office (NSO) data shows that the headline CPI surged to a 17-month high of 6.95% in March from 6.07% in February. The headline retail inflation has now exceeded the inflation target of the Monetary Policy Committee (MPC) for three consecutive months. The retail inflation averaged 5.5% in FY22 in annual terms and has remained unchanged higher than the mid-point of the MPC’s medium-term target band for the second consecutive year.

Food price inflation in rural areas has more than doubled, from 3.94% in March 2021 to 8.04% in March 2022.

Commodity prices have hit multi-year highs owing to the geopolitical conflict between Russia-Ukraine alongside supply chain disruptions.

More recently, wholesale price inflation came in at a four-month high of 14.55% in March, thereby completing one year in double-digit territory. A higher WPI inflation is seen as a precursor to higher consumer prices as producers pass on rising costs to customers.

“Companies are likely to face a double whammy of higher input prices and high cost of borrowing as banks have started hiking lending rates after the RBI effectively raised the overnight money market rates by 40 bps. Growth prospects face severe downside risks whereas inflation has upside risks,” said Dr. Arun Singh, Global Chief Economist, Dun and Bradstreet.

RBI’s hawkish pivot

Taking note of these rising inflationary pressures, the Reserve Bank of India (RBI) Governor Shaktikanta Das in the latest MPC meet said that the apex bank is now prioritising inflation over growth.

Das said that the RBI has unanimously decided to change its policy stance from remaining accommodative “
as long as necessary to revive and sustain growth on a durable basis” to remaining accommodative “
while focusing on withdrawal of accommodation to ensure that inflation remains within the target going forward while supporting growth”.

Further, the RBI has now revised its inflation outlook upwards and growth outlook downwards, owing to external uncertainties. RBI lowered the FY23 GDP growth forecast to 7.2% year-on-year from the previous forecast of 7.8%.

It expects input cost pressures to persist longer than expected earlier driven by a broad-based surge in key industrial input prices and global supply chain disruptions, following the Russian invasion of Ukraine. RBI has now revised its retail inflation forecast for FY23 to 5.7% year-over-year from 4.5% earlier.

“Rising external shocks, coupled with greater domestic vulnerability, could increase capital outflows from the Indian markets, resulting in tighter domestic financial conditions in the coming months. India’s vulnerability critically hinges on crude oil prices because they impact its major macros, including the gross domestic product, inflation, current account deficit, rupee and, in some cases, fiscal deficit,” research firm CRISIL said.