The ongoing Russia-Ukraine conflict is exerting a material influence on non-core CPI inflation amidst the sharp ascent in commodity prices. In addition, amidst a normalizing environment as vaccinations gain critical mass and personal mobility soars, core inflation too is likely to remain elevated. This mix of core and non-core price pressures, in a post COVID economy is likely to accord CPI inflation an enduring upside in FY23. We estimate CPI inflation to average in the range 6.1-6.3% in FY23 i.e., above both RBI’s inflation target band (of 2-6%) and its recent upwardly revised estimate of 5.7%. From monetary policy perspective, we argue that policy normalization needs to be slow and gradual to minimize the sacrifice ratio as economic recovery still remains incomplete and uneven. Towards this, in a deviation from classic textbook prescription, a tighter monetary policy will require continued support from fiscal policy to absorb some cost of higher inflation. We are penciling in 75 bps of front-loaded rate hikes for FY23.
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