RBI MPC maintains FY25 inflation forecast, food prices remain a challenge

With food inflation contributing over 75 per cent to headline inflation in May and June and making up 46 per cent of the CPI basket, vegetable prices accounted for 35 per cent of June's inflation

The Reserve Bank of India (RBI), in its Monetary Policy Committee announcement on Thursday (August 8), maintained its inflation projection for FY25 at 4.5 per cent, stating that high food price momentum is expected to have persisted through July.

However, the RBI updated its CPI inflation forecast for Q2 FY25 to 4.4 per cent, an increase from the earlier estimate of 3.8 per cent. The Q3 FY25 forecast has been adjusted slightly to 4.7 per cent from 4.6 per cent, while the forecast for Q4 FY25 has been lowered to 4.3 per cent from 4.5 per cent. For Q1 FY26, CPI inflation is expected to be 4.4 per cent.

 

RBI Governor Shaktikanta Das noted that headline inflation reached 5.1 per cent in June 2024, driven by unexpected factors. While fuel prices remained in deflation for the tenth consecutive month, food inflation surged. Core inflation saw a historic low during May and June.

With food inflation contributing over 75 per cent to headline inflation in May and June and making up about 46 per cent of the CPI basket, vegetable prices alone accounted for roughly 35 per cent of June's inflation. Das pointed out the persistent inflation pressures across other major food items.

He stressed the importance of prioritising inflation control and price stability to foster growth. Despite India's robust growth, inflation continues its downward trend, with core inflation hitting historic lows in May and June.

The RBI aims for an inflation target of 4 per cent, with a tolerance range of 2 percentage points. Retail inflation last approached this target in January 2021 at 4.06 per cent. Nonetheless, food prices remain a significant concern, driving the recent increase in retail inflation, which rose to 5.08 per cent in June from 4.75 per cent in May.

Acknowledging the weight of food inflation at 46 per cent in headline inflation, Das emphasised that it cannot be overlooked. "The MPC cannot afford to ignore persistently high food inflation as it may have spillover effects," he stated.