Inflation Expected To Ease To 4.6% In First Three Quarters Of FY25, Says RBI

Retail inflation is expected to ease closer to the central bank's target in the next fiscal, according to the Reserve Bank of India.

CPI inflation increased to 5.6% in November as the recurrence of food price spikes punctured a brief respite in September and October. But, it is expected to ease to 4.6% in the first three quarters of FY25, the RBI said in its monthly bulletin for December.

The main risk to the outlook stems from the evolution of inflation in the months ahead, the RBI maintained. It is expected that these pressures will linger on into December, before the usual winter softening sets in and dispels these adversities, the bulletin said.

"The repetitive nature of food imbalances impinging on prices reinforces our view that for India, it is the food category that is the true ‘core' of inflation, with second order effects that delay the policy goal of aligning headline inflation with the target," it said.

Consequently, a lasting solution to these sporadic flares is the only panacea, it said. Supply augmenting measures and adjustments have the lead role here, but monetary policy shall have to respond if food inflation, as a whole, becomes lastingly elevated and sends secondary impulses across other prices, according to the bulletin.

Core inflation has been steadily disinflating, attesting to the efficacy of monetary policy actions and stance, it said.

For the ongoing month, high frequency food price data so far shows that while prices of cereal and pulses rose further, edible oil prices continued on a broad-based decline, according to the RBI. Among key vegetables, onion prices, though elevated, are showing signs of correction in December. Potato prices declined, while tomato prices registered an uptick.

GDP clocked a growth of 7.7% in the first half of FY24. High frequency indicators suggest that this build-up in momentum will sustain over the rest of the year, it said. The central bank's economic activity index now casts GDP growth for Q3 FY24 at 6.7%.

Key Highlights

• A silver lining is that hitherto tepid rural demand is on the mend.

• The recent release of Rs 10,000 crore to meet enhanced expenditure under the rural job guarantee scheme and the provision of free food grains under the Pradhan Mantri Garib Kalyan Anna Yojana for a period of five years would cushion rural consumption and preserve the stimulus from government final consumption expenditure.

• A major driver of growth has been the public policy thrust on infrastructure, which has propelled gross fixed capital formation into double-digit growth.

• This boost is also likely to be sustained as the quality of public spending improves on an ongoing basis.

• Merchandise exports recorded a positive momentum and incoming data will indicate if this is a turnaround from a long contraction.

• On the supply side, agriculture is flattening after seven consecutive years of record food grain production, but prospects remain bright for allied activities such as livestock, forestry and fishing.

• The biggest upside surprise is stemming from the broad-based strengthening of industrial value added, especially manufacturing. The surge in profitability, aided by easing input costs, is expected to sustain this dynamism.

• As inflation eases, a revival of top-line growth will support the manufacturing expansion. Among services, construction activity remains robust, boosted by housing demand.

• Other categories of services are normalising from the post-pandemic revenge spending, but underlying momentum remains resilient.