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Informist, Friday, Dec. 6, 2024

NEW DELHI – The Reserve Bank of India on Friday sharply raised its headline inflation forecast for the current quarter ending December by 90 basis points to 5.7%, while it hiked the projection for the current financial year by 30 bps to 4.8%. The recent spike in inflation highlights the continuing risks of multiple and overlapping shocks to the inflation outlook and expectations, it stated.

"The increasing incidence of adverse weather events, heightened geopolitical uncertainties and financial market volatility pose upside risks to inflation," Governor Shaktikanta Das said while presenting the fifth bi-monthly monetary policy for FY25. At the meeting, the RBI's Monetary Policy Committee kept the policy repo rate unchanged at 6.50% and stuck to neutral policy stance in order "to remain unambiguously focused on a durable alignment of inflation with the target, while supporting growth." "The MPC remains committed to restoring the inflation growth balance in the overall interest of the economy," Das said.

India's CPI inflation rose to a 14-month high of 6.21% in October from 5.49% in September, both of which Das described as "little more than what we expected". The rise in headline inflation was mainly because of a sequential, "unanticipated" rise in food prices. This was the first month since August 2023 that headline inflation was above the upper bound of the Reserve Bank of India's medium-term target range of 2-6%. This was also the second month in a row when CPI inflation was above the central bank's 4% target after having come in below it in July and August.

Food prices have been at the heart of the central bank's inflation management issues, and it is here to stay, even though the Governor listed reasons which may help reign it in. "Food inflation pressures are likely to linger in Oct-Dec of this financial year and start easing only from Jan-Mar, backed by seasonal correction in vegetable prices, kharif harvest arrivals, likely good rabi output and adequate cereal buffer stocks," the governor said.

Food inflation rose to a 15-month high of 10.87% in October from 9.24% in September. Sequentially, the food price index rose 2.6% in October, which pushed the general index of the CPI 1.3% higher from September. Within food, the biggest month-on-month increase in prices was seen in vegetables, which rose 8.2% in October from the previous month. Edible oil prices also rose sharply in October, rising 6.0% on month from September. Prices of cereals and pulses also continued to rise in October.

The quarterly break-up of the central bank's latest inflation forecasts is as follows: 5.7% for Oct-Dec, and 4.5% for Jan-Mar, 4.6% for Apr-Jun and 4% for Jul-Sept. It had previously forecast that inflation in the final two quarters of FY25 to average 4.8% and 4.2%, respectively. On the other hand, it was projected at 4.3% in Apr-Jun. 

Das had, in an earlier policy meeting, used "horse" as a metaphor for inflation. At the post-policy press conference Friday, he said that the horse has made valiant efforts to reign in, and now the task of the central bank is to keep it on a tight lease. 

Going ahead, a good rabi season would be critical to the softening of the food inflation pressures. Early indications point to adequate soil moisture content and reservoir levels, conducive for rabi sowing, Das said. The estimates of a record kharif production should also bring relief to the elevated prices of rice and tur dal while vegetable prices are also expected to see a seasonal winter correction, he said. 

According to data from the Department of Agriculture and Farmers Welfare, as of Monday, rabi sowing across India this year stands at 42.88 million hectares, up 4.1% on year. Kharif production, on the other hand, is expected to be 8 million tonnes in 2024-25 (Jul-Jun), exceeding initial government estimates by at least 1 million tonnes. 

The seasonal winter correction in vegetable prices was also particularly explained by the RBI staff in a paper as part of its Monthly Bulletin for October. "Prices of potatoes and onions increase in November and the seasonal pressures ease in February and May, respectively. Tomato prices increase during July and moderate by March," the paper had said. The other components of CPI show lower seasonal variations. 

"High inflation reduces the disposable income in the hands of consumers and dents private consumption, which negatively impacts the real Gross Domestic Product growth," the governor said. Consumption demand, which has been tepid, has given the government pain in achieving stronger growth in FY24. This year, there has been an improvement, data shows. Private consumption grew 6.0% in Jul-Sept, higher than 2.6% a year ago, but lower than the 7.4% a quarter ago. Even though consumption demand is better on year, urban demand is under scanner as there are signs of a slowdown. 

"The MPC believes that only with durable price stability can strong foundations be secured for high growth," Das said. As widely expected, the RBI Friday lowered its GDP growth forecast for FY25 by 60 basis points to 6.6% after Jul-Sept GDP growth fell to a seven-quarter low of 5.4%, which was 160 basis points lower than the RBI's projection of 7.0%. "Price stability is essential for sustained growth." At the post-policy press conference, Deputy Governor Michael Patra said that underlying slowdown in growth was due to inflation. 

Manufacturing and services firms surveyed by the central point to the firming up of input costs and selling prices in Jan-Mar, the governor added. 

On the upside, Das said that the evolving trajectory of domestic edible oil prices, following the hike in import duties and rise in their global prices, needs to be closely monitored. All said, risks to inflation forecasts are evenly balanced, the MPC statement said. "Going forward, as food price shocks wane, headline inflation is likely to ease and realign with the target as per our projections," the governor said. He reiterated that the last mile of disinflation is turning out to be arduous globally.

On a question regarding targetting core inflation, which strips out food and fuel items, as part of the policy framework, Das said that the legal mandate of the MPC is to look at headline inflation and so the central bank does not have the discretion to choose otherwise. 

This debate on a rethink on what component of inflation to target came after the Economic Survey for FY24 compiled by Chief Economic Adviser to the government V. Anantha Nageswaran, had said India's inflation targeting framework should consider excluding food inflation as higher food prices are, more often, not demand-induced but supply-induced. Short-run monetary policy tools are meant to counteract price pressures arising out of excess aggregate demand growth, it said, adding that it is "worth exploring whether India's inflation targeting framework should target the inflation rate excluding food".

In this endeavour, Das said that the central bank's effort is to follow the flexible inflation targeting framework, and that the RBI's "anti-inflationary monetary policy stance has been a crucial factor in bringing about a significant disinflation". The RBI's medium target for CPI inflation is 4%, with the lower and upper end of the target being 2% and 6%, respectively. Last time CPI inflation was at the central bank's target was four years ago, in Jul-Sept of 2019-20. 

Das said that the gains achieved so far in the broad direction of disinflation, notwithstanding the recent upticks, need to be preserved. "At the same time, the growth trajectory and the evolving outlook also need to be monitored closely.  A status quo in monetary policy in this meeting of the MPC has thus become appropriate and essential," the governor said.   End

Reported by Priyasmita Dutta

Edited by Deepshikha Bhardwaj and Akul Nishant Akhoury

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