'The Elephant In The Room..': RBI Expects FY25 Inflation At 4.5%; CPI To Cool Below 4% In Q2

The Reserve Bank Of India (RBI) said the elephant in the room is inflation. And to tame it, RBI governor Shaktikanta Das said monetary policy must continue to be disinflationary. He further said that robust growth prospects give MPC enough room to focus on inflation and allow the central bank to move towards its 4% target on CPI.

Accordingly, with the assumption of normal monsoon, RBI maintained its overall forecast of CPI inflation for FY 2024-25 at 4.5%. However, every quarter, the CPI target was trimmed.

Now, RBI projects CPI inflation at 4.9% in Q1FY25 from the earlier target of 5%, while it estimates CPI at 3.8% in Q2 from the earlier estimate of 4%. Further, RBI predicts CPI at 4.6% in Q3 which is the only quarter where the central bank has not trimmed its forecast. Lastly, CPI inflation is seen at 4.5% in Q4 from the earlier forecast of 4.7%. The risks are evenly balanced.

Right after the Kremlin's all-out invasion of Ukraine in late February 2022, inflation spiked to a multi-decade high in Western and emerging economies. India too faced the brunt of multi-year high inflation which led RBI to a series of aggressive hikes in the policy repo rate, pushing the key rate to 6.5% highest since August 2018.

However, FY24 was much more comforting than FY23 with resilient economic growth and cooling off inflation at a slower pace which led RBI to keep rates unchanged at 6.5% since April 2023. FY24 did not see any hike and neither cuts in repo rate hence.

At latest, India's consumer price index (CPI) inflation eased to 5.09% in February 2024, compared to 5.10% in the previous month. However, the latest inflation print was slightly below market expectations. Nonetheless, retail inflation stays below RBI's upper tolerance limit of 6% for the sixth consecutive month.

The biggest spoilsport currently is the rising food prices. The consumer food price index (CFPI) inflation rate rose to 8.66% in February 2024, compared to 8.30% in January 2024, and 5.95% in the same month a year ago.

Currently, RBI's medium-term target for consumer price index (CPI) inflation is of 4% within a band of +/- 2%, while supporting growth.

Meanwhile, RBI kept policy repo rate under the liquidity adjustment facility (LAF) unchanged at 6.50%. Consequently, the standing deposit facility (SDF) rate remains unchanged at 6.25% and the marginal standing facility (MSF) rate and the Bank Rate at 6.75%. The MPC also decided to remain focused on withdrawal of accommodation to ensure that inflation progressively aligns to the target, while supporting growth.