inflation: RBI monetary policy: Reserve bank bumps up inflation expectation

The Reserve Bank of India bumped up inflation expectations for the year as soaring vegetable prices pushed up headline numbers, but took comfort in the fact that core inflation – other than food and oil – remains under control.

Assuming a normal monsoon, the central bank raised the inflation projection for FY24 by 30 basis points to 5.4% as compared with 5.1% projection in the last policy announcement. The second quarter is likely to see steep numbers at 6.2% before moderating to 5.7% in the next three-month period.

“Headline inflation projection for Q2 has been revised up substantially, primarily due to the price shock from vegetables,” RBI Governor Shaktikanta Das said.

“On the positive side, inflation excluding food and fuel (core inflation) has softened by more than 100 basis points from its recent peak in January 2023,” he added.
The headline inflation print rose to 4.8% in June against 4.3% in May, thanks to higher vegetable prices. The July print is expected to be higher following the spike in tomato prices and further increase in prices of cereals and pulses.The monetary policy committee looked through through high inflation prints and kept the policy repo rate unchanged at 6.5%, given the short term nature of these shocks and expectation of a quick reversal.”Policymakers drew confidence from moderation in core prints and expect a seasonal correction in food in 4Q23, but this was balanced with an emphasis that further action will be warranted on signs of un-anchoring in inflationary expectations as well as if inflation stays above the mid-point target of 4% on a durable basis,” DBS Bank senior economist Radhika Rao said.This pushed back rate cut expectations, especially in light of a notable upward revision in the 1QFY25 inflation forecast, she added.

Das expects vegetable prices to see a “significant correction” after a few months while the prospects of kharif crops have brightened, thanks to improvement in the progress of the monsoon.

The frequent incidences of recurring food price shocks, however, pose a risk for the monetary policy authority in anchoring inflation expectations, which has been underway since September 2022.

“Uncertainties, however, remain on domestic food price outlook due to sudden weather events and possible El Niño conditions in August and beyond. Global food prices are also exhibiting a hardening bias on renewed geopolitical tensions. Crude oil prices have firmed up in recent weeks and its outlook is clouded by demand-supply uncertainties,” the governor warned, reiterating that the MPC is committed to align inflation to the 4% target as mandated by law and anchor inflation expectations accordingly.