RBI MPC increases FY24 inflation forecast to 5.4% from 5.1%

With monetary transitions still underway and headline inflation remaining higher than the 4 percent target, the MPC has decided to remain focused on the withdrawal of accommodation to ensure inflation progressively progress aligns with the target while supporting growth, he added.

"The moderation in headline inflation to 4.6 percent in the first quarter of this fiscal was in line with the projections set out in the June MPC meeting. There was pickup in headline inflation to 4.8 percent in June due to an upturn in food inflation. On the positive side, inflation excluding food and fuel – that is core inflation – has softened by more than 100 bps from its recent peak in January 2023," Das said.

The governor said headline inflation rose in June and is expected to surge in July and August as well. India's CPI inflation increased to 4.81 percent in June from 4.31 percent in the previous month.

The headline inflation is likely to witness a spike in the near months on account of supply disruptions due to adverse weather conditions, he said. The RBI governor also said that there are uncertainties about domestic food prices because of El Nino conditions in August and beyond.

Das said, going by the past trends, vegetable prices may see significant changes in the coming month. "Going forward, the spike in vegetable prices, led by tomatoes, would exert sizeable upside pressures on the near-term headline inflation trajectory. This jump is, however, likely to correct with fresh market arrivals," he said.

India produces 20 million metric tonnes of tomatoes every year, but this year the production dropped by 31 percent pushing prices as high as Rs 100-200 per kg, making it more expensive than petrol and diesel in parts of India.

"Crude oil prices have firmed up amidst production cuts. Manufacturing, services and infrastructure firms polled in the Reserve Bank’s enterprise surveys expect input costs to ease but output prices to harden," he added.

The RBI MPC's inflation renewed inflation forecast was based on these factors and the assumption of a normal monsoon, Das said.

In its last meeting on June 8, the RBI MPC reduced its inflation forecast to 5.1 percent from 5.2 percent for this fiscal year.

Kaushik Das, Chief Economist, Deutsche Bank, said he thinks the RBI has kept a lot of buffer in its forecasts, rather than keeping on changing every policy. "So I think, they have now kept it on the higher side and I think inflation now will surprise to the lower side compared to the forecast that they have given. So they have given 6.2 percent for July, September, as I told you before, my forecast is about 5.8 percent. So I think by September, you will see a very sharp disinflation, and then the numbers will keep on surprising to the downside," he said.

Apart from the inflation trajectory, which is projected again, the good thing is that quarter three onwards the inflation as expected is projected less, that is going to be a positive, said CS Setty, MD of SBI.