The RBI sounded the bugle on rising core inflation just when headline inflation was showing signs of a durable decline. In April, the consumer price index fell to a 69-month low of 3.16 percent. Given it’s the sixth consecutive monthly decline, the central bank seemed just one step away from declaring victory over inflation. But instead, it cautioned in its latest monthly bulletin about rising core inflation, thanks to highly elevated gold prices. As it is, core inflation rose to a 18-month high of 4.21 percent in April; if the price spike continues, it will spark fears about a return of the inflationary beast. And as the RBI noted, globally, the progress on the last mile of disinflation seems to have stalled. That said, headline inflation is the anchor for the central bank’s monetary policy committee and a lower print allows enough headroom to proceed with rate cuts. Analysts expect back-to-back rate cuts in June and August, besides lowering the inflation outlook to 4 percent for 2025-26. If it happens, it will be the first time in at least three years that annual inflation will comply with the RBI’s 4 percent target.
Meanwhile, the central bank also warned that global growth remains fragile and continues to face significant challenges including trade tensions, increased policy uncertainty, and subdued consumer sentiment. This comes at a time when India’s fourth quarter growth in 2024-25 seems to have slowed and is expected to print at about 6.5 percent as against a robust 8.4 percent in Q4, 2023-24. However, the RBI maintained that the Indian economy will stay resilient despite external headwinds. Citing high-frequency indicators, it reasoned that both industrial and services sectors maintained steady momentum through April. Wholesale vehicle sales, an indicator of demand, declined by 13.3 percent due to a high base effect.
While the domestic indicators offer some room for recovery, much depends on how the talks on trade and terror will progress in the coming weeks. As for the trade deal with the US, preliminary discussions suggest the likelihood of a favourable agreement. It’s the terror tension at the border that needs a close watch. The government must resolve it at the earliest, as such uncertainty is detrimental to the country’s growth prospects.