RBI raises FY25 inflation estimate to 4.8%, CPI to remain elevated in Q3

The Reserve Bank on Friday raised the inflation projection for current fiscal year to 4.8 per cent from 4.5 per cent with Governor Shaktikanta Das saying lingering food price pressures are likely to keep headline inflation elevated in the December quarter.

Consumer price index (CPI)-based inflation increased sharply in September and October 2024 led by an unanticipated increase in food prices.

Core inflation, though at subdued levels, also registered a pick-up in October. Fuel group remained in deflation for the 14th consecutive month in October.

"In the near term, despite some softening, lingering food price pressures are likely to keep headline inflation elevated in Q3," Das said while unveiling the December 2024 monetary policy.

RBI said CPI inflation for 2024-25 is projected at 4.8 per cent, with Q3 at 5.7 per cent; and Q4 at 4.5 per cent.

CPI or retail inflation for Q1:2025-26 is projected at 4.6 per cent, and Q2 at 4 per cent.

In the October policy, the central bank had estimated the inflation at 4.5 per cent for the fiscal ending March 2025.

"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," the Governor said.

CPI headline inflation increased from average 3.6 per cent during July-August to 5.5 per cent in September and further to 6.2 per cent in October 2024, which was the highest in more than a year, since September 2023.

He further said the estimates of a record kharif production should bring relief to the elevated prices of rice and tur dal. Vegetable prices are also expected to see a seasonal winter correction.

On the upside, Das said the evolving trajectory of domestic edible oil prices, following the hike in import duties and rise in their global prices, need to be closely monitored.

"The near-term inflation and growth outcomes in India have turned somewhat adverse since the October policy. The medium-term prognosis on inflation suggests further alignment with the target, while growth is expected to pick up its momentum," Das said.

He further said persistent high inflation reduces the purchasing power of consumers and adversely affects both consumption and investment demand. The overall implication of these factors for growth is negative.

"Therefore, price stability is essential for sustained growth. On the other hand, a growth slowdown if it lingers beyond a point may need policy support," Das said.

The Governor noted that high inflation reduces the disposable income in the hands of consumers and dents private consumption, which negatively impacts the real Gross Domestic Product (GDP) growth.

The increasing incidence of adverse weather events, heightened geopolitical uncertainties and financial market volatility pose upside risks to inflation, he added.

Das also said the last mile of disinflation is turning out to be prolonged and arduous, both for advanced and emerging market economies (EMEs).

The government has tasked the RBI to ensure inflation remains at 4 per cent with a margin of 2 per cent on the either side.