Inflation horse brought to the stable, has to be kept on a tight leash: RBI

RBI on CPI inflation, inflation forecast India: Even as the Reserve Bank of India (RBI) has changed its monetary policy stance to 'neutral' from 'withdrawal of accommodation', it remains mindful of the risks to inflation in the months ahead. It has highlighted adverse weather conditions, ongoing geopolitical conflicts, and a rise in select commodities as the key threats to its inflation forecast.

The inflation horse, RBI Governor Shaktikanta Das said, has been brought to the stable, and has to be kept on a leash with doors closed so that it does not bolt again.

"The monetary policy prudently prioritised flexibility, by changing the stance to neutral, in line with our expectations. This has opened the door for a potential rate cut in December 2024, if the lurking risks to inflation, both domestic and global, do not materialise. In our view, the Indian rate cut cycle will be fairly shallow, restricted to 50 basis points (bps) over two policy reviews," said Aditi Nayar, chief economist and head of Research and Outreach at ICRA.

Headline consumer price index (CPI) inflation, meanwhile, moderated to 4.4 per cent in April-August 2024 from 5.2 per cent in H2-CY24. Core inflation dipped to its lowest level of 3.1 per cent in the current series (since January 2012), the RBI said, before increasing in July-August. 

Food price inflation, on the other hand, remained elevated, averaging 6.9 per cent over the last five months (April-August 2024), and contributing 72.5 per cent of headline inflation during the period.

While the September inflation print may see a significant pick-up as base effects turn adverse and food prices register an upturn, food inflation, the RBI said, is expected to ease by Q4:2024-25 on better kharif arrivals and rising prospects of a good Rabi season.

The RBI has cut its CPI inflation forecast for the first quarter of fiscal year 2025-26 (Q1-FY26) to 4.3 per cent from 4.4 earlier. CPI inflation for 2024-25 is projected at 4.5 per cent with Q2 at 4.1 per cent; Q3 at 4.8 per cent; and Q4 at 4.2 per cent.

Food inflation outlook

Experts see the food inflation to remain balanced in the months ahead. Late monsoon withdrawal (vegetables) and government policies (edible oil) though are upside risks, analysts at Nomura cautioned, but improving crop prospects (cereals, pulses) suggest further declines could be in store.

“The government’s intervention is aimed at balancing the interests of food consumers and food producers. Too low food prices are also a negative for farmers," wrote Sonal Varma, chief economist for India and Asia ex-Japan at Nomura in a recent note co-authored with Aurodeep Nandi.

Food inflation momentum, particularly after excluding the volatile vegetables components, eased again in September, but recent government interventions such as its reconsideration of export bans on rice and higher import tariffs on edible oils are aimed at stemming excessive food price declines.

Crude oil prices a concern

At the global level, the developing geopolitical crisis in West Asia had sent crude oil prices soaring to $80 a barrel levels earlier this week – the first time since August – from $68 just a fortnight ago, translating into a sharp rise of around 18 per cent. They have cooled off a tad to around $78 a barrel now.

“If oil facilities in Iran are targeted, crude price spikes are inevitable. However, analysts will have to see what an Iranian response to such attacks would be. If, in response, Iran were to target energy infrastructure in neighboring states or supply routes such as the Strait of Hormuz, crude prices would easily rise above $100 per barrel again,” cautioned Joe DeLaura, global energy strategist at Rabobank International in a coauthored note with Florence Schmit, energy strategist at Rabobank International.