Consumer price index (CPI) based inflation is expected to ease below 4 per cent in fiscal 2024-25 if monsoon remains normal and there are no further policy shocks, the Reserve Bank of India(RBI) said.
‘For 2024-25, assuming a normal monsoon, and no further exogenous or policy shocks, structural model estimates indicate that inflation will average 4.5 per cent, in a range of 3.8-5.2 per cent,’ the RBI said in its Monetary Policy Report for October 2023.
RBI Governor Shaktikanta Das has said that the central bank may rethink on cutting the repo rate only when it sees CPI inflation at around 4 per cent or below it on a durable basis.
The survey projects CPI inflation to be at 4.3 per cent in the fourth quarter of FY2025. CPI inflation was at 6.83 per cent in August 2023.
Many analysts expect the RBI to start cutting repo rate only in 2024 when inflation may soften to near 4 per cent target.
‘We are pushing out the first rate cut from February to April, while retaining our forecast for 100 basis points (bps) in cuts in 2024 which would take the policy repo rate to 5.5 per cent by end-2024,’ Nomura said in a report.
Deutsche Bank’s chief economist (India & South Asia) Kaushik Das said the RBI will embark on a rate cut cycle starting from April 2024.
In its monetary policy announced on October 6, the RBI left the repo rate unchanged at 6.5 per cent on concerns over high inflation which poses a major risk to macroeconomic stability and sustainable growth. During FY2024, the RBI expects CPI inflation to be at 5.4 per cent, with Q2 at 6.4 per cent, Q3 at 5.6 per cent and Q4 at 5.2 per cent.
The RBI said the baseline forecasts are subject to several upside and downside risks. The upside risks emanate from more persistent food price increases due to weather related disturbances, which could then feed into inflation expectations; further hardening of global commodity prices amidst an escalation of geopolitical tensions; and a larger pass-through of input cost pressures to output prices.
The downside risks could come from an early resolution of geopolitical tensions, a steep correction in global crude and commodity prices in the event of a sharp slowdown in the global growth, and further improvement in supply conditions.
On Friday, RBI Governor highlighted that volatile energy and food prices in the wake of lingering geopolitical tensions and adverse weather conditions render uncertainty to the inflation outlook and said that the RBI remains vigilant of the evolving inflation dynamics.
The RBI’s rate setting Monetary Policy Committee (MPC) observed that the recurring incidence of large and overlapping food price shocks can impart generalisation and persistence to headline inflation.
‘I would like to emphatically reiterate that our inflation target is 4 per cent and not 2 to 6 per cent. Our aim is to align inflation to the target on a durable basis, while supporting growth,’ Das said while announcing the policy.
Consumer confidence at 4-year high: RBI survey
The RBI said its consumer confidence survey for the current period reverted to its recovery path after a brief pause in July 2023 round of the survey. The current situation index (CSI) reached a four-year high of 92.2 on the back of respondents’ better assessment of current general economic situation and employment conditions in September 2023.
‘General economic outlook as well as the prospects for employment, income and spending are expected to improve further over the next one year. The future expectations index (FEI) also reached a four-year high of 122.3 in the latest survey round,’ the RBI survey said. Households remain highly optimistic on future earnings even though their sentiment on current earnings remained around its July 2023 level.
