RBI lowers quarter-wise inflation forecast for FY25, holds key rate steady

Inflation 'elephant has left the room and it appears to be on its way to the forest,' says RBI governor Shaktikanta Das

The Reserve Bank of India's (RBI) Monetary Policy Committee (MPC) on Friday lowered its consumer price index (CPI) inflation forecast for the first, second, and the fourth quarter of Financial Year 2024-25 (FY25). Inflation in the second quarter is projected at 3.8 per cent, below the central bank's target of 4 per cent.

The rate-setting panel, in its first meeting of the financial year, kept the repo rate unchanged at 6.5 per cent. Five out of six members voted in favour of the rate decision while the monetary policy stance of 'withdrawal of accommodation' was retained with a majority of five votes.

The RBI projected the inflation in the first quarter (April-June) at 4.9 per cent, against its earlier forecast of 5 per cent. The fourth quarter (January-March) is estimated at 4.5 per cent, against the earlier 4.7 per cent forecast. The inflation forecast for FY25 remained unchanged at 4.5 per cent.

“As we expected, the MPC policy took recognition of the fluidity of global narratives, even as domestic dynamics have stayed favourable. This suggests that when needed, the aim of financial stability may even precede inflation management,” said Madhavi Arora, lead economist at Emkay Global Financial Services.

“We have long maintained that the RBI policy has been somewhat pegged to the Fed [US Federal Reserve], specifically over the last two years, even as it formally targeted inflation. This seems fair, as external dynamics have been fluid, implying that the policy prerogative needs to be flexible for ensuring financial stability. The fluidity of global narratives and policy repricing, in conjunction with the near-term problem-of-plenty on INR/bonds, could make it arduous for the RBI to find a balance in its policy biases,” said Arora.

“Thus, we maintain the RBI’s tone will slowly tiptoe to ‘Gracklish’ from the usual ‘Hawk-Dove’ signaling, implying a non-committal stance and limited definite forward guidance ahead,” she added.

“Inflation was the elephant in the room. Now the elephant has left the room and it appears to be on its way to the forest. We would like the elephant to go to the forest and stay there,” said RBI governor Shaktikanta Das in this monetary policy statement.

He noted that headline inflation has decreased since its peak in December. However, persistent food price pressures have been impeding the ongoing disinflation process, posing challenges for the final descent of inflation to the target.