RBI fails to contain inflation within mandated band as CPI inflation sores to 5 months high at 7.41 pc

With this, inflation has now spent 36 months or three full years above the RBI's medium-term target of 4 percent.

As per the definition of flexible inflation targeting framework,  RBI has failed as the inflation has been outside the mandated 2-6 percent tolerance range for three consecutive quarters.

It has also averaged 6.3 percent in January-March, 7.3 percent in April-June, and now 7 percent in July-September.

Mainly driven by rising food prices, the figure remained well over the Reserve Bank of India's (RBI) upper tolerance band for the ninth consecutive month.

RBI has to now provide a report to the Centre elaborating the reasons for its failure, the actions it proposes to overcome the causes it proposes, and the time period within which inflation will return to target.

Higher inflation has been worrying for central banks across the countries, including India, as the uncertain nature of the Russia-Ukraine war worsened supply-side disruptions.

After two shocks of the coronavirus pandemic and the conflict in Ukraine, now we are in the midst of another shock, a storm, arising from aggressive monetary policies by the global central banks, RBI Governor Shaktikanta Das said last month. 

Food inflation, which comprises nearly half the CPI basket, jumped 8.60 percent in September 2022 as against 7.62 percent in August.

Amid this, industrial growth, as measured by the Index of Industrial Production (IIP), reduced by 0.8 percent in August as compared to 2.4 percent in July, according to the data released by the National Statistical Office (NSO).

In the pre-policy press conference on September 30, RBI Governor Shaktikanta Das had said the Monetary Policy Committee (MPC) would meet to discuss the RBI's report to the government.

"So, what we will write, I will not say. But as I have said earlier, we are expecting the inflation to come down close to the target over a two-year cycle, that was our expectation earlier and even now," Das had added.

RBI forecasts CPI inflation to average 6.7 percent in FY23 before going down to 5.2 percent in FY24.

Reactions

"The recent rise in food inflation is exacerbated by seasonal phenomenon and the fresh arrival of Kharif output would provide some comfort on that front. RBI would be concerned about high food inflation and its adverse impact on inflationary expectations," said Rajani Sinha, chief economist at CareEdge Ratings, according to Economi Times.

Senior economist at Kotak Institutional Equities CPI Inflation Suvodeep Rakshit said CPI inflation in September at 7.41% was in line with our expectations of 7.35 percent.

Food items continue to see an upside in price momentum, especially in cereals and vegetables.

"Lower acreage and unseasonal rains will continue to impart upside to food prices. Core inflation at 6.26 percent is in line with the trend of the past 4-5 months and will likely be around this handle over the rest of FY2023," he said.

"We believe that the September inflation print should keep the RBI on course for a 35 bps hike in December with inflation remaining above 6% at least till February 2023 and reduce gradually towards the 4.5-5.5% range in FY2024," Rakshit said.

"External sector concerns as well as uncertainty on energy prices will keep the RBI’s policy is contingent on incremental data and events,” he added.