Uncertainties in food price will shape outlook for inflation

The Reserve Bank of India (RBI) has retained its inflation projection for FY25 at 4.5 per cent with Q1 at 4.9 per cent; Q2 at 3.8 per cent; Q3 at 4.6 per cent and Q4 at 4.5 per cent. However, the outlook for inflation will largely be shaped by food price uncertainties. However, there will be a trade-off between indications of a normal monsoon on the one side and increasing incidences of climate shocks on the other side. With four per cent inflation target in FY26, the RBI is possibly guiding the market with a prolonged rate cut cycle, and in all probability with than a couple of rate cuts. Ecowrap expects a series of rate cuts beginning October, followed by another in December and possibly in February. The stance can change in October itself. Real GDP growth projection for FY25 is retained at seven per cent with risks evenly balanced. While agriculture may be supported by the likelihood of a normal monsoon in a best-case scenario, manufacturing is expected to maintain its momentum on the back of sustained profitability.

The RBI MCP has, quite on anticipated lines, kept the policy repo rate unchanged at 6.50 per cent for the seventh time in a row, with one of the six members vouching a different stance to reduce the policy rate by 25 bps. The central bank has decided to remain focused on withdrawal of accommodation to ensure that inflation progressively aligns with the target, while supporting growth. Clearly, Mint Street has more on its mind than what most can gauge as it navigates through the ‘right path’ balancing growth and price prints, with pass-through of exogenous shocks likely to have a toll on the economic wellbeing of nations. An ever-evolving global narrative, easier system liquidity and moderating core inflation, despite strong growth, acted as backdrops for the recent MPC meeting. The policy tone was confident on domestic dynamics and on meeting external financing needs, with no change in FY25 growth and inflation trends despite near-term food-led risks.

While the RBI took the fluidity of global narratives into consideration, its governor Shaktikanta Das insisted that their policy reaction function is driven primarily by domestic dynamics. On the domestic front, the MPC acknowledged consistent broad-based easing in core inflation even as it reckoned that uncertainties in food prices need a closer watch. Despite healthy progress in Rabi production, uneven seasonality in vegetable prices, coupled with increasing incidence of climate shocks, warrant careful monitoring. But it continued to stress on monetary policy percolation on easing core inflation. Shaktikanta Das reiterated the need to maintain growth-inflation dynamics. On the growth front, rural demand is expected to pick up based on a normal monsoon and consequent growth in rural income. Climate shocks, both domestically and internationally, as per Prabhudas Liladhar, could lead to spikes in food prices in the near term. Hence, the central bank will be watchful of upcoming growth and inflation dynamics, and a rate cut may be deferred until October, post-monsoon.