The Reserve Bank of India (RBI) has decided to maintain its inflation forecast for the fiscal year 2024-25 at 4.5%, despite the challenges posed by a scorching summer that could push up food prices. The central bank also drew some relief from the recent drop in crude oil prices, which fell below $80 per barrel for the first time since February.
Inflation for the fiscal year 2023-24 stood at 5.4%, in line with the RBI's projections. The Monetary Policy Committee (MPC), in a four-to-two majority, has opted to keep the repo rate unchanged at 6.5% for the eighth consecutive time. The MPC has also maintained the policy stance, emphasizing the gradual withdrawal of accommodation.
"While announcing the policy decisions, RBI Governor and MPC Chair Shaktikanta Das highlighted the central bank's vigilance towards any potential upside risks to inflation, particularly from food prices," said Governor Das. "Vegetable prices have seen an uptick due to the summer season, and global food prices have also started to rise."
The RBI's latest projections for inflation in the current fiscal year are as follows: Q1 - 4.9%, Q2 - 3.8%, Q3 - 4.6%, and Q4 - 4.5%, with risks evenly balanced. In its April policy, the RBI had projected inflation rates of 4.9%, 3.8%, 4.6%, and 4.5%, assuming a normal monsoon.
The RBI's inflation target remains at 4% (with a tolerance band of 2 percentage points on either side). India's retail inflation in April eased marginally to an 11-month low of 4.83% year-on-year, down from 4.85% in the previous month. However, concerns persist about rising food prices, with food inflation growing at 8.7% in April, up from 8.52% in March. Notably, prices of vegetables and pulses have remained stubbornly high, with garlic seeing an inflation rate of 110.1% annually in March and ginger at 54.6%.
Core inflation, excluding food and fuel, remained stable at 3.4% in April. However, uncertainties remain regarding the impact of weather variations on inflation and economic stability.
The RBI's annual report has highlighted the significant uncertainty posed by climate shocks on the outlook for food inflation and overall inflation in India. The ongoing heatwave in India could further exacerbate inflationary pressures due to rising commodity prices.
Meanwhile, Brent crude oil prices eased below $80 a barrel on June 3, following an agreement among OPEC+ members to phase out voluntary output cuts later this year. Earlier, the Indian government had warned of threats to inflation and economic growth from the surge in oil prices due to disruptions in the Red Sea, emphasizing the need for diversifying trade routes to mitigate risks.
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