On the back of a healthy pick-up in the south-west monsoon and progress in sowing, the Reserve Bank of India has projected the consumer price index (CPI) inflation at 4.5 per cent for the current financial year, with an expectation of relief in the food inflation. The RBI governor Shaktikanta Das stated that the headline inflation went up to 5.1 per cent in June after posing steady numbers at 4.8 per cent during April and May 2024. The CPI inflation for the first quarter of FY25-26 is projected at 4.4 per cent.
The RBI has pegged the CPI inflation at 4.9 per cent for Q1FY25, 4.4 per cent for Q2FY25, 4.7 per cent for Q3FY25 and 4.3 per cent for Q4FY25. The apex bank expects the large favourable base effect to push the headline inflation downwards. The core inflation (CPI excluding food and fuel) moderated to a historic low in May and June, with fuel remaining in deflation for the tenth consecutive month.
The monetary policy committee (MPC) cannot afford to look through high food inflation, the governor highlighted. It is important for monetary policy to stay the course while maintaining a vigil on inflation, the governor stated while reiterating the central bank’s focus on keeping the inflation level below four per cent. The central bank has kept the repo rate unchanged at 6.5 per cent in its 50th monetary policy committee meeting.
Upasna Bhardwaj, Chief Economist, Kotak Mahindra Bank said, "The RBI expectedly kept rates and stance unchanged with unambiguous focus being retained on inflation. With growth remaining robust the MPC still has room to hold on to policy stance to get confirmation on the disinflationary trend. We continue to expect scope for change in stance in the October policy with rate cuts beginning from December."
The Food Inflation Concerns
Food inflation remains the biggest headache for the apex bank as it slows the process of disinflation. Food inflation has a weight of around 46 per cent in the CPI basket, which contributed to more than 75 per cent of the headline inflation in May and June. With this much share in the CPI basket, the food inflation pressures cannot be ignored, according to the RBI governor.
Vegetable prices increased sharply, contributing about 35 per cent to inflation in June and the momentum is likely to have continued in July. Food inflation went up to 9.55 per cent in June, from 8.69 per cent in May, as the vegetable prices went 27.33 per cent.
Amid the ongoing debates over excluding food inflation from the CPI inflation, the RBI governor stated that food inflation pressures cannot be ignored. He said, “The public at large understands the inflation more in terms of food inflation than the other components of headline inflation. We should not become complacent merely because the core inflation has fallen considerably.”
Madan Sabnavis, Chief Economist, Bank of Baroda reflected upon the RBI’s stance on food inflation by stating, “The RBI has quite unambiguously stated that the focus would be on headline inflation and that one cannot ignore food inflation, especially if it is persistent. This indicates that while inflation will come down in Q2, it will rise in Q3, and one cannot take a rate cut for granted in future.”
The RBI governor mentioned, “Equally important is the reality that food inflation adversely affects the household inflation expectations. The household inflation expectations, after witnessing the moderating trend between May 2022 and September 2023, have edged up on the back of high food inflation since November 2023.” The apex bank governor highlighted that such high inflation could lead to spillovers in the core inflation, through a pick-up in wages on cost-of-living considerations.
