Does RBI’s inflation projection of 4.5% in FY25 leave little room for an interest rate cut in the near future?

The RBI has projected retail or consumer price index-based inflation at 4.5% in FY25, which is above the 4% target mandated by the government for the monetary policy committee.

How should one interpret the RBI’s projected inflation at a higher rate? First, there is no room for a substantial interest rate cut in the near future. The higher-for-longer trend will likely continue for some time.

Second, the risks to inflation have not receded significantly. Food inflation continues to be a concern. The RBI stated that large and repetitive food price shocks are hindering the pace of disinflation, primarily led by the moderation of core inflation. RBI Governor Shaktikanta Das remarked, “The inflation trajectory going forward would be shaped by the outlook on food inflation, about which there is considerable uncertainty.”

Third, global developments and geopolitical issues remain pertinent. The Red Sea conflict and other geopolitical events, along with their impacts on supply chains and volatility in international financial markets and commodity prices, pose significant upside risks to inflation, as stated by the RBI.

Fourth, a high fiscal deficit post-COVID-19 will have implications for money supply and inflation. In fact, the general elections will also increased spending, further influencing the inflation trajectory.

Fifth, Governor Das’s frequent statements and emphasis on reaching the 4% inflation target indicate ongoing vigilance. In today’s policy statement, he reiterated, “The job is not yet finished, and we need to be vigilant about new supply shocks that may undo the progress made so far.”

Finally, higher growth at 7% and a nominal GDP of 11.5% will likely contribute to sticky core inflation.