RBI makes no change to FY24 inflation forecast, implies sub-5% CPI in September

The RBI had hiked its inflation forecast for 2023-24 by 30 basis points to 5.4 percent in August.

In a surprise move, the Reserve Bank of India (RBI) on October 6 made no change to its inflation forecast of 5.4 percent for 2023-24, although it made minor tweaks to the projections for the second and third quarters.

Interestingly, the latest forecast implies that headline retail inflation may crash to 4.9 percent in September.

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The quarterly break-up of the inflation forecast is as follows:

>> July-September 2023 Consumer Price Index (CPI) inflation forecast raised to 6.4 percent from 6.2 percent

>> October-December 2023 CPI inflation forecast lowered to 5.6 percent from 5.7 percent

>> January-March 2024 CPI inflation forecast retained at 5.2 percent

>> April-June 2024 CPI inflation forecast retained at 5.2 percent

"While near-term inflation is expected to soften on the back of vegetable price correction, especially in tomatoes, and the reduction in LPG prices, the future trajectory will be conditioned by a number of factors," Governor Shaktikanta Das said on October 6 while announcing the Monetary Policy Committee's (MPC) decision to leave the repo rate unchanged at 6.5 percent for the fourth meeting in a row.

CPI inflation hit a 15-month high of 7.44 percent in July before cooling to 6.83 percent in August, taking the average for the two months to 7.1 percent. For inflation to average 6.4 percent - as per the RBI's latest forecast - in July-September, it has to fall to 4.9 percent or so in September.

Retail inflation data for September will be released on October 12. Economists generally see CPI inflation easing to around 5.3 percent.

While the RBI did not make any meaningful change in its inflation forecasts, Governor Das warned that the central bank had identified high inflation as a "major risk to macroeconomic stability and sustainable growth".

"I would like to emphatically reiterate that our inflation target is 4 percent
and not 2 to 6 percent," he added.

While CPI inflation may have returned to the RBI's 2-6 percent tolerance range in September, it has been above the medium-term target of 4 percent for nearly four years.

The lack of any major change in the RBI's inflation forecast may have to do with the fact that the central bank continues to assume $85 per barrel as the price of India's crude oil basket for the second half of 2023-24. The other assumptions, old and new, are as follows:

>>  A rupee exchange rate of 82.5 per dollar in October 2023-March 2024 as against 82 per dollar assumed in April for 2023-24.

>> Monsoon of 6 percent below long-period average in 2023-24 as against normal monsoon assumed in April.

>> Global growth of 3.0 percent in 2023 and 2024 as against 2.9 percent in 2023 and 3.1 percent in 2024 assumed in April.

There were no changes in the assumptions relating to the fiscal deficit and domestic macroeconomic and structural policies.