The Reserve Bank of India (RBI)'s monetary policy report for April 2024 offers a cautiously optimistic stance on inflation.
While the central bank projects a moderation in headline inflation, it remains vigilant about the risks posed by food price pressures, geopolitical tensions, and global economic uncertainties. The central bank projects a moderation in headline inflation, driven by easing food prices and the sustained decline in core inflation.
According to the RBI's inflation expectations survey, both three-month and one-year ahead median inflation expectations of urban households decreased by 20 basis points compared to the previous round. This decline in expectations is a positive sign, indicating that the public's perception of future inflation is improving.
The RBI's industrial outlook survey also points towards easing cost pressures in the manufacturing sector for Q1:2024-25. However, the services and infrastructure sectors expect higher input cost pressures, with services firms anticipating an increase in selling prices.
Professional forecasters surveyed by the RBI expect headline CPI inflation to moderate from 5.4% in Q3:2023-24 to 4.6% in Q4:2024-25. They also project core inflation to remain stable in the near term before gradually increasing to 4.3% by Q4:2024-25. The 5-year ahead inflation expectations remained unchanged at 4.7%, while the 10-year ahead expectations declined by 20 basis points to 4.3%.
The RBI acknowledged that the inflation outlook largely depends on the evolving food inflation dynamics. It noted that while Rabi sowing has exceeded last year's levels, the production of cereals, pulses, and oilseeds has fallen short of the previous year's figures. Water reservoir levels also remain significantly below last year's level and the decadal average.
The report highlighted that the continuing pass-through of monetary policy actions and stance is keeping core inflation subdued. However, adverse weather events and ongoing geopolitical hostilities pose key risks to the inflation outlook.
The central bank projects CPI inflation to average 4.5% in 2024-25, with risks evenly balanced. For 2025-26, assuming normal monsoon conditions and no further shocks, inflation is expected to average 4.1%. The RBI also provides confidence intervals for its projections, indicating the range within which inflation is likely to fall.
The report outlines several upside and downside risks to the baseline forecasts.
Upside risks include persistent food price pressures from extreme weather events, escalation in geopolitical hostilities, increased volatility in commodity prices, and a larger pass-through of input cost pressures to output prices. Downside risks encompass an early resolution of geopolitical conflicts, a pronounced slowdown in global demand, and an improvement in the supply of key primary commodities.