RBI Policy: FY25 Inflation Target Unchanged At 4.5%; Why RBI Did Not Lower CPI Estimates?

The Reserve Bank of India's (RBI) Monetary Policy Committee (MPC) has once again upheld its inflation forecast for the financial year 2024-25 at 4.5%. In its fourth bi-monthly policy meeting held on October 9, the RBI decided to keep the inflation outlook unchanged, citing balanced risks while addressing the ongoing challenges posed by food prices, global tensions, and domestic factors.

The RBI's inflation projections for 2024-25 offer a detailed look at the expected price trends throughout the year. As per the MPC's announcement, inflation is expected to be at 4.1% in the second quarter (Q2), 4.8% in the third quarter (Q3), and 4.2% in the fourth quarter (Q4). Meanwhile, the Consumer Price Index (CPI) inflation for the first quarter of the subsequent financial year, 2025-26, is projected at 4.3%. RBI Governor Shaktikanta Das stated, "The risks to inflation are evenly balanced".

A significant aspect of the RBI's analysis involves food prices, which have shown varying trends across different subgroups. During the months of July and August 2024, headline inflation saw a notable decline, partly due to base effects, while food inflation underwent some correction. However, disparities within food subcategories remain. Essential items like onion, potato, and gram (chana dal) continue to experience price pressures, largely due to poor production levels during the 2023-24 fiscal year.

The fuel group, meanwhile, saw deflation, driven by a decrease in electricity and LPG prices. Nonetheless, the situation is fluid, with global fuel prices showing signs of rising again, which could reverse these gains.

Das further noted that the CPI for September is likely to see a substantial jump due to an unfavourable base effect combined with rising fuel prices. "CPI for September is expected to see a big jump due to unfavourable base effects and a pick-up in food price momentum," he cautioned, stressing the need to remain vigilant.

The ongoing geopolitical conflicts, unexpected weather conditions, and global commodity price fluctuations also pose risks to inflation. The recent uptick in food and metal prices, as observed in the FAO (Food and Agriculture Organisation of the United Nations) and World Bank price indices for September, could further add pressure to the CPI, should these trends persist.

Retail inflation had fallen below 4% in July and August 2024, marking a temporary relief with an average retail inflation of 4.3% from April to August. However, food inflation has continued to hover above 5%, reflecting the sustained pressure from vegetable prices, particularly due to extended monsoon conditions. If these weather patterns persist, inflation could trend upward in the coming months, with some experts estimating that inflation may hover around 5%.

While oil prices remain under control for the moment, global developments such as China's economic stimulus efforts could push up commodity prices, further exacerbating inflationary pressures.

In addition to inflation projections, the RBI's MPC voted to keep the policy repo rate unchanged at 6.5% for the tenth consecutive time. This decision was made with a 5:1 majority. The unchanged repo rate-the rate at which the RBI lends to commercial banks-has been a key factor in the central bank's efforts to manage inflation while ensuring liquidity in the economy.

A notable shift in this policy meeting was the MPC's decision to move from a 'withdrawal of accommodation' stance to a more 'neutral' policy stance. The former, which involved gradually tightening monetary policy to combat inflation, has been replaced by a neutral approach that allows for more flexibility in response to evolving economic conditions. Governor Das remarked, "We have to be careful about opening the gates, or the horse may bolt again".

On the growth front, the RBI has maintained its GDP growth target for the financial year 2024-25 at 7.2%. This steady growth projection reflects confidence in the economy's underlying strength, despite the inflationary challenges and global uncertainties.