Headline inflation is easing but it could reverse in Q2: RBI

The Reserve Bank of India (RBI), in its monthly bulletin for June 2024, has said that though headline inflation is easing, the path of disinflation is being interrupted by volatile and elevated food inflation, which may cause it to reverse in the second quarter of 2024-25.

The RBI, in its 'State of the Economy' report, says there's a need for "careful monitoring" of spillovers from food price pressures to core inflation and inflation expectations in order to align with the headline inflation target. "This necessitates a continuation of the disinflationary stance."

India's retail inflation dipped to a 12-month low of 4.75% in May 2024, down slightly from April's 4.83%.

Notably, RBI Governor Shaktikanta Das, in his MPC announcements address, had also said that there is still work to be done. "Monetary policy remains squarely focused on price stability to effectively anchor inflation expectations and provide the required foundation for sustained growth over a period of time”.

The central bank in its latest report says the global growth was resilient in the first quarter of 2024, and that many central banks have pivoted towards a less restrictive monetary policy stance in response to the fall in inflation. "In India, the high-frequency indicators suggest the real GDP growth in Q1:2024-25 is broadly maintaining the pace it achieved in the preceding quarter," the RBI says, adding that the prospects for agriculture are brightening with the early landfall of the southwest monsoon.

Notably, the monetary policy committee (MPC) of the RBI during its June 5-7, 2024, meeting, the second bimonthly meeting for the year 2024-25, voted to keep the policy repo rate unchanged at 6.50%. It reiterated its stance of remaining focused on the withdrawal of accommodation to ensure that inflation progressively aligns with the target while supporting growth.

The RBI's committee has found that India's domestic economic activity is "resilient". "High-frequency indicators of activity reflect a sustained momentum in manufacturing and services. The prospects for agriculture are brightening with the expectations of an above-normal SWM and the actual landfall ahead of its schedule. This should augur well for spurring rural demand and, in turn, support private consumption," the report adds.

The RBI's committee also expects that investment activity would be bolstered by strong balance sheets of banks and corporates, the policy emphasis on infrastructure spending, and rising business optimism.

Despite risks from geopolitical tensions, volatility in international commodity prices, and geoeconomic fragmentation, the MPC had projected the real GDP to rise by 7.2% in 2024-25, over and above the growth rate of 8.2% achieved in the year gone by.

It said the headline inflation was projected to ease from 5.4% in 2023-24 to 4.5% in 2024-25, with evenly balanced risks from the rising incidence of adverse climate events, pressures from input costs and volatility in crude prices and financial markets on the one hand, and the benign effects of the monsoon on food prices on the other.