RBI Policy: FY24 inflation now seen 30 bps higher at 5.4%, big hike in Q2 forecast

Headline retail inflation averaged 4.6 percent in the first quarter of 2023-24, in line with the forecast the RBI had made in June.

The Reserve Bank of India (RBI) on August 10 made an upward revision to its inflation forecast for 2023-24, raising it by 30 basis points to 5.4 percent.

In his address on the Monetary Policy Committee's (MPC) latest decision to leave the key policy repo rate unchanged at 6.5 percent for the third time in a row, RBI Governor Shaktikanta Das said the risks to the inflation forecasts were "evenly balanced".

Driving the full-year inflation forecast hike was that for the second quarter, which is now seen at 6.2 percent - a full hundred basis points higher than previously hoped - due to a sharp increase in vegetable prices.

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"The month of July has witnessed accentuation of food inflation, primarily on account of vegetables. The spike in tomato prices and further increase in prices of cereals and pulses have contributed to this. Consequently, a substantial increase in headline inflation would occur in the near-term," Das said in his address announcing the MPC's decision.

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

>> July-September 2023 Consumer Price Index (CPI) inflation forecast raised to 6.2 percent from 5.2 percent

>> October-December 2023 CPI inflation forecast raised to 5.7 percent from 5.4 percent

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

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

Source: Reserve Bank of India

As is visible in the forecasts, the huge jump in inflation in July-September is expected to recede quickly, with the RBI governor saying that past trends suggested vegetable prices may see a "significant correction" after a few months.

"Given the likely short-term nature of these shocks, monetary policy can look through high inflation prints caused by such shocks for some time," Das added.

CPI inflation is set to shoot up in July - data for which will be released on August 14 - and cross the upper bound of the Indian central bank's 2-6 percent tolerance range for the first time in five months.