RBI predicts CPI inflation to average 5.6% in current quarter

The momentum of the change in GDP is sequentially expected to be higher in Q3:2023-24 (October-December), with festival demand remaining ebullient, the RBI's monthly ‘State of the Economy’ article, released on November 16, it said.

In urban areas, consumer appliances are in strong demand, especially in the mid- and premium segments. Consumer sentiment is upbeat, the RBI bulletin article added

As per the RBI's own forecast, the Consumer Price Index (CPI) inflation is set to average 5.6 per cent in the current quarter. With the October print at 4.87 per cent, inflation must average six per cent in November-December for the RBI's forecast to be met.

While current trends suggest the RBI's forecast may be undershot, it may not result in any easing of monetary policy by the MPC and economists expect the rate-setting panel to retain the repo rate at 6.5 percent possibly up to the middle of 2024-25 as it looks to bring inflation down to the medium-term target of four per cent on a durable basis.

After hiking the policy repo rate by 250 basis points to 6.5 percent in 2022-23 to bring down inflation, the MPC left the policy rate unchanged on October 6 for the fourth meeting in a row.

Festival-related demand in India has been ‘ebullient’ and consumer sentiment is upbeat, the Reserve Bank of India's (RBI) latest monthly bulletin has said, although it added that there were ‘miles to go’ to go on the inflation front and that India is ‘not out of the woods yet’.

The momentum of the change in GDP is sequentially expected to be higher in Q3:2023-24 (October-December), with festival demand remaining ebullient, the RBI's monthly ‘State of the Economy’ article, released on November 16, it said.

In urban areas, consumer appliances are in strong demand, especially in the mid- and premium segments. Consumer sentiment is upbeat, the RBI bulletin article added.

The monthly article includes Deputy Governor Michael Patra - one of the three RBI representatives on the Monetary Policy Committee (MPC) - as one of its co-authors. However, the views expressed in the article do not reflect the central bank's official stance.

The Union government and the RBI expect the economy to post a GDP growth rate of 6.5 per cent in 2023-24, although market expectations are closer to six percent. However, GDP growth for the July-September quarter - data for which will be released on November 30 - may exceed the RBI's forecast, also pegged at 6.5 per cent.

There is wide consensus supported by nowcasts that real GDP growth will outperform the projections of the RBI. The RBI's projections incorporated a turnaround in the momentum of activity into expansion in Q2 and hence the consensus, if actualised, would imply a stronger pace of activity than projected, the State of the Economy article noted, adding that corporate results for the last quarter backed this optimism.

While RBI official expressed optimism on the growth front, they warned that the job with regards to inflation was far from over, even though headline retail inflation eased to 4.87 per cent in October.

We are not out of the woods yet and have miles to go, but readings of around five percent and 4.9 per cent in September and October, respectively, are a welcome relief from the average of 6.7 per cent in 2022-23 and 7.1 per cent in July-August 2023, the article said.