The central bank now sees inflation for Q2, Q3 and Q4 of this fiscal year at 4.4%, 4.7% and 4.3%, respectively. In the June policy, the monetary authority had pegged the inflation readings at 3.8%, 4.6% and 4.5% respectively. Inflation stood at 4.9% in the first quarter.
The RBI today also gave its inflation forecast for the first quarter of the next fiscal year, pegging it at 4.4%.
RBI MPC Rate Decision
RBI Governor and MPC Chair Shaktikanta Das said the Monetary Policy Committee may look through high food inflation if it is transitory but in an environment of persisting high food inflation, as we are experienceing now, the MPC can not afford to do so. “It has to remain vigilant to prevent spillovers or second round effects from persisting food inflation and preserve the gains made so far in monetary policy credibility,” Das said.”We have decided to focus on inflation and support price stability to ensure growth,” Das said while announcing the policy decisions. Inflation is moderating, but the pace is slow, he said.
Also Read: RBI MPC Meet Highlights 2024: Das & Co keep rates and stance unchangedThe Reserve Bank of India’s (RBI) Monetary Policy Committee in four-to-two majority decided to keep the repo rate – key lending rate- unchanged at 6.5% for the ninth time in a row. The rate-setting panel, again with four-to-two majority, also left the policy stance unchanged with focus on withdrawal of accommodation.The decision comes as the Monetary Policy Committee meets a final time before the exit of its external members, marking the first of several key policymaker changes in the coming months. This reshuffle could alter the recent split within the panel, where two of the six members voted for a rate cut, arguing that high inflation-adjusted real rates could harm the economy’s growth prospects.
The decision to leave rates unchanged also comes amid near-certain speculations that the Federal Reserve may cut rates in September as weak jobs data sparked debate about the world’s largest economy facing threats of recession.
Nonetheless, RBI’s decision should be based on the bountiful rains the swathes of India’s farm land received in recent weeks and other domestic factors if we are to believe that Governor Shaktikanta Das is sticking to his stance of not towing the developed world in monetary policy making.
RBI Governor: Inflation on declining trend, but…
While India’s growth remains strong, inflation is on a declining trajectory, Das said, adding that core inflation moderated to historic lows in May and June.
However, while fuel group remained in disinflation, the expected moderation in headline inflation in 2Q of this FY on account of favourable base may reverse in the coming quarters, the governor said. In the third quarter, India has a substantial advantage that may pull down the inflation number but the base effect will wear out going ahead, he added.
The high food price momentum is likely to have continued in July also, Das said.
Continuing food price shocks slowed the process of disiflation in the first quarter of 2024-25. There is also a significant difference between overall inflation and core inflation. This raises the question of how much attention the MPC should give to food inflation, Das added.
“While core inflation is benign, the stubborn food inflation poses the risk of second round effects and there requires constant vigil. Thus, policymakers are in no rush to lower their guard as of now. Trajectory of domestic food inflation and evolving path of the Fed rate are the key monitorables in the near-term,” said Kapil Gupta, Executive Director- Research, Nuvama Institutional Equities.
RBI Inflation Target
The RBI has an inflation target of 4% (with a leeway of 2 percentage points on either side). The country’s retail inflation was closest to the 4%-mark last in January 2021 at 4.06%.
Das had earlier referred to inflation pain as the ‘elephant in the room’, which he had said had left for the jungle.
However, inflation remains a major concern for the world’s most-populous country. Economists to policymakers have indicated the threats of price pains that continue to singe the budget of households in a country where experts have flagged a K-shaped recovery and growing income inequality.
India’s retail inflation rate in June accelerated for the first time in five months to 5.08 per cent from 12-month low of 4.75 per cent in the previous month due to increase in food prices.
MPC Meet: Food prices remain a wory
Food inflation which accounts for around half the overall CPI basket, increased to 9.55 per cent in June from 8.69 per cent in May and 4.55 per cent in June 2023. Vegetable prices jumped 27.33 per cent. Food prices have been increasing by over 8% year-on-year since November 2023.
India’s inflation index is heavily influenced by food prices, as a significant portion of the population spends most of their income on food.
Experts had earlier indicated that a higher food inflation number could keep overall inflation from declining significantly.
Prices of key vegetables such as onion, tomato and potato have risen and a Crisil analysis recently showed the cost of a veg thali in India rose 11% sequentially in July.
Concerns persist regarding the impact of weather variations on inflation and economic stability.
The RBI in its latest annual report had said that the increasing incidence of climate shocks imparts considerable uncertainty to the food inflation and overall inflation outlook.
While India received higher than normal rainfall for several regions in July 2024, the India Meteorological Department also forecast above average rainfall for the second part of monsoon.
However, several major foodgrain-producing states remain in significant deficit. As La Niña takes precedence, excessive rainfall could lead to crop losses and negatively impact food prices, according to an SBI Research report.
“A degree of relief in food inflation is expected from the pick-up in the south-west monsoon and healthy progress in sowing. Buffer stocks of cereals continue to be above the norms,” Das said today.
“Despite an above-normal monsoon so far (6.4% above the Long Period Average as of 4th August), the overall risk of food inflation remains high due to highly uneven rainfall in the first half of the monsoon season,” CareEdge had said ahead of the monetary policy decision.
Food inflation has remained above 6% for the past year, averaging 8%. Further supply-side shocks could keep inflation high, destabilising expectations, it said. Adequate rainfall in deficit regions is crucial for sowing activities. Hence, monitoring the timing and distribution of the monsoon is essential.
In addition to the risks to food inflation, recent telecom tariff hikes by major mobile service providers, ranging from 10-25%, will exert upward pressure on core inflation.
However, crude oil prices hit an 8-month low recently amid U.S. recession fears and Middle East geopolitical tensions.