With geopolitical tensions clouding the price situation, the Reserve Bank of India (RBI) has raised the retail inflation projection for the current financial year to 5.7 per cent from earlier forecast of 4.5 per cent, though it expects moderation in prices of cereals and pulses on a likely record harvest of winter season (rabi) crop.

In wake of the ongoing Russia-Ukraine war, RBI Governor Shaktikanta Das said the prices of crude oil as well as edible oil will likely remain elevated.

Unveiling the first monetary policy review of the current fiscal year 2022-23 on Friday, the six-member Monetary Policy Committee (MPC) headed by Das voted unanimously to keep the policy repurchase (repo) rate unchanged at 4 per cent for the 11th time in a row. Repo is the short term lending rate which the RBI charges to the banks.

In the previous MPC meeting in February 2022, RBI had projected a moderating path for retail inflation during 2022-23 at 4.5 per cent.

Das said the heightened geopolitical tensions since end-February have upended the earlier narrative and considerably clouded the inflation outlook for the year.

Stating that a likely record rabi harvest would help to keep domestic prices of cereals and pulses in check, he said, global factors such as loss of wheat supply from the Black Sea region and the unprecedented high international prices of wheat could put a floor under domestic wheat prices.

With regard to non-food items, the spike in international crude oil prices since end-February poses substantial upside risk to inflation through both direct and indirect effects, the apex bank said. A combination of high international commodity prices and elevated logistic disruptions could aggravate input costs across agriculture, manufacturing and services sectors.

Their pass-through to retail prices, therefore, warrants continuous monitoring and proactive supply management. Financial markets are likely to remain volatile on rising risk, dislocations in trade and capital flows and divergent monetary policy responses across central banks, Das said.

"Taking into account these factors and on the assumption of a normal monsoon in 2022 and average crude oil price (Indian basket) of USD 100 per barrel, inflation is now projected at 5.7 per cent in 2022-23, with Q1 at 6.3 per cent; Q2 at 5.8 per cent; Q3 at 5.4 per cent; and Q4 at 5.1 per cent," he stated.

RBI said given the excessive volatility in global crude oil prices since late February and the extreme uncertainty over the evolving geopolitical tensions, any projection of growth and inflation is fraught with risk.

It is largely contingent upon future oil and commodity price developments, the Governor said.

The RBI, which takes into account the retail inflation before arriving at its bi-monthly monetary policy reviews, has been mandated to keep it at 4 per cent with a bias of 2 per cent on the either side.

Notably, retail inflation is hovering above the RBI's upper tolerance level for the past couple of months. It was 6.07 per cent in February and 6.01 per cent in January, mainly due to an uptick in food prices.

"... Continuation and deepening of supply side measures may alleviate food price pressures and also mitigate cost-push pressures across manufacturing and services. On our part, let me assure all stakeholders that as in the past, the Reserve Bank will use all its policy levers to preserve macroeconomic stability and enhance the resilience of our economy. The situation is dynamic and fast changing and our actions have to be tailored accordingly," Das said.

Das said the extreme volatility characterises commodity and financial markets. While the pandemic (COVID-19) quickly morphed from a health crisis to one of life and livelihood, the conflict in Europe has the potential to derail the global economy.

"Caught in the cross-current of multiple headwinds, our approach needs to be cautious but proactive in mitigating the adverse impact on India's growth, inflation and financial conditions."

The MPC also decided unanimously to remain accommodative while focussing on withdrawal of accommodation to ensure that inflation remains within the target going forward, while supporting growth, the Governor said.

Addressing a press conference after the policy announcement, he also said that RBI has now reordered the priority to target inflation first and then growth through its monetary policy interventions.

Just before the onset of the pandemic, RBI's priority order approach was to support growth first followed by retail inflation targeting.