The Reserve Bank of India (RBI) is likely to lower its inflation forecast by 10-15 basis points (bps) for FY25 to 4.3-4.4 percent from 4.5 percent earlier, on the expectation of a shift from El Nino to La Nina, which may support food prices in later part of 2024, said Abhishek Bisen, Head- Fixed Income, Kotak Mutual Fund in an interview with Moneycontrol.
Bisen further said that the central bank may maintain a status quo in the April monetary policy considering the robust growth, but may continue to cite challenges in managing last mile of inflation.
The Monetary Policy Committee (MPC) of the RBI will meet from April 3 to 5 to decide on interest rates.
Inflation numbers
In February, India’s Consumer Price Index (CPI) Inflation was largely unchanged at 5.09 percent, from 5.1 percent in the previous month.
While CPI inflation has extended its stay inside the RBI's tolerance range of 2 percent to 6 percent for the sixth consecutive month, it has now spent 53 months in a row above the medium-term target of 4 percent.
Even after this, core inflation or inflation excluding food and fuel - fell further to 3.3 percent from 3.6 percent in January, according to Moneycontrol calculations.
On the core inflation front, Bisen said that even though RBI draws comfort from falling core inflation it would stay cautious of food and oil inflation as RBI’s fundamental goal is to align headline CPI inflation with the 4 percent target on a durable basis.
“This has been the most comforting factor among the various macroeconomic factors that the RBI tracks. However, since other factors such as the monsoon and US Fed are still not clear and GDP growth also is reasonable, we believe that despite such a lower and more comfortable core inflation, the RBI shall keep an eye on headline and wait for signs of durable easing in to act on rates,” RBI said.
In February, prices of vegetables were largely steady, with their index down a marginal 0.1 percent as compared to the previous month.
On the whole, the Consumer Food Price Index rose 0.1 percent MoM, with food inflation - which measures the year-on-year change in the price index - rising to 8.66 percent from 8.30 percent.
He also expects the RBI to maintain the stance at “withdrawal of accommodation” with some probability of changing the stance to “neutral”.
Bond inclusion inflows
Bisen said that the inclusion of the government bond in “JP Morgan EM bond index” and “Bloomberg’s EM Local Currency Government Index” has already seen positive impact on debt FPI inflow in India and the same has increased considerably since the announcement of inclusion in JP Morgan EM bond index.
Since the announcement in October last year of the inclusion of India Government Bonds in the JP Morgan Bond Index, FPI into Fixed Income segment has crossed $10 billion, he added.
He further said cumulative FPI Flows for the year 2023-24 are now close to $15 billion and will be the first positive flows since 2019, a gap of four-years. JP Morgan Bond Index Inclusion alone could add $22-23 billion of inflows and another $2 billion flows could come from the Bloomberg EM Bond Index.
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