Will RBI Governor Stick to the Script on Rates?
The Reserve Bank of India (RBI) Governor Shaktikanta Das is set to announce the monetary policy outcome tomorrow. Most economists predict the central bank will maintain the current rates as the battle against inflation continues, with the 4 percent target still out of reach.
What’s Changed Since April?
Since the last policy meeting in April, inflation has eased but remains above the central bank’s target. In April, headline retail inflation was 4.83 percent, slightly down from 4.85 percent in March. The RBI aims to bring inflation within the 2-6 percent target band and eventually align it sustainably at 4 percent. The RBI’s April estimate suggested inflation would stay above 4 percent throughout this fiscal year, except for a potential dip in the second quarter.
The RBI projects a retail inflation rate of 4.5 percent for the fiscal year 2025, assuming a normal monsoon. The quarterly projections are 4.9 percent for Q1, 3.8 percent for Q2, 4.6 percent for Q3, and 4.5 percent for Q4.
Key Questions Ahead
Several key questions need answers:
- Monsoon Behavior: The Indian Meteorological Department (IMD) forecasts an above-normal monsoon. However, two significant risks could affect this: a potential surge in global crude prices if the Iran-Israel conflict escalates and a possible spike in food inflation due to heatwaves predicted by the IMD. These factors remain uncertain.
- Impact of Surprise Poll Verdict: The recent elections yielded a surprising outcome, with the Congress-led INDIA bloc securing 232 seats, against the predicted BJP sweep. The BJP is expected to form a coalition government with the TDP and JDU. If the government shifts towards a populist budget due to coalition pressures, it could impact inflation management, potentially causing the Monetary Policy Committee (MPC) and RBI to hold rates longer than anticipated.
- Food Prices and Base Effect: Rating agency ICRA predicts food and beverages inflation could exceed 8 percent in May 2024 due to a combination of adverse base effects and above-normal temperatures. This would push headline CPI inflation to a five-month high of 5.1-5.2 percent.
- Global Factors: Global crude oil prices could surge if the Israel-Iran conflict escalates. Additionally, a heatwave across India could trigger a spike in food inflation, disrupting the inflation calculations of India’s rate-setting panel.
The Road Ahead
The central bank is unlikely to rush into a rate reversal until there are clear signs of inflation easing to 4 percent. This target may still be some time away.
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