In its recent monetary policy statement, the Reserve Bank of India (RBI) may have factored in consumer price inflation for January 2022 moving slightly above the upper band of its target range, but it may need to revisit its inflation projections for the next fiscal year, going by incoming data points. Just consider these. Inflation in edible oil continues to be high at 18.7 per cent due to soaring global prices of soyabean oil and palm oil. With limited room to reduce duties further or ease supply through policy measures, higher edible oil prices will continue exerting pressure on inflation in the coming quarters too, until domestic supplies are increased substantially. uel and lighting is another area that continues to increase household costs, growing 9 per cent in January. With crude oil prices remaining elevated due to geopolitical tensions as well as renewed demand with the ebbing of the third wave of the Covid-19 pandemic, it may not be prudent to expect relief on this front any time soon. The central bank has also not taken into account the surge in international base metal prices and the impact it has on input costs of producerse A weaker rupee ctemming from the exit of foreign portfolio investors can further increase the cost of imported products. The WPI reading in January was 12.9 per cent, underlining the pressure on corporates. With companies unable to pass on the increase in input costs to consumers, corporate profitability could be adversely affected.

RBI’s optimism regarding a benign inflation of 5.7 per cent in fourth quarter of this fiscal and 4.5 per cent for the next seem largely led by softening food prices and reduction in prices of pulses, cereals and vegetables. But the central bank seems to be underplaying the threat from edible oil and fuel. Also core inflation is likely to be further impacted by the disruptions caused by Omicron. There are, however, some factors that can offset the impact. One, government borrowing for 2022-23 could be lower than budgeted given the Centre’s large cash balance with the RBI, two, the conservative growth pencilled in for tax revenues for the next fiscal in the Union Budget and finally, the Centre’s tight leash on revenue expenditure. The recent cancellations of government bond auctions also send a signal to the market that the Centre is not in urgent need for funds and will not borrow at very high rates. Reduction in government borrowing for unproductive revenue expenditure may dampen inflationary effects (even as inflation remains primarily cost-push driven), as there would be less liquidity infusion in the economy. Another factor that could temper inflation at this juncture is the consistent foreign portfolio outflows, which would at least not add to the existing liquidity surplus. But even if all these positives are taken into account, the inflation projection for next fiscal yearsseems too rosy.

The need to keep bond yields under check in order to facilitate the large government borrowing for 2022-23 could be one reason why RBI is trying to under-play the threat from inflation. But this strategy could prove counter-productive in the long-run.

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