RBI MPC Meet: Is the central bank hinting at higher prices in near future? Here's what experts feel

The Reserve Bank of India (RBI) has revised India's Consumer Price Inflation forecast for 2024-25 to 4.8% from 4.5%, with Q3 expected to be at 5.7% and Q4 at 4.5%. The MPC announced its continued neutral stance, suggesting the possibility of rate cuts if inflationary pressures decrease in the upcoming months.

In October, the panel unanimously shifted the policy stance from focusing on withdrawal of accommodation to a neutral position. However, Governor Shaktikanta Das had previously mentioned that the change in stance at that time did not necessarily guarantee rate cuts.

What did the Governor say

Governor Das noted food inflation is expected to decrease in the fourth quarter due to the seasonal decrease in vegetable prices and the arrival of kharif harvests. Favorable soil moisture conditions and sufficient reservoir levels also bode well for rabi production.

However, adverse weather events and the increase in global agricultural commodity prices present potential risks for food inflation. Despite the recent decrease in energy prices, Reserve Bank of India Governor Shaktikanta Das emphasized the importance of monitoring its sustainability.

Businesses anticipate continued high input costs and an increase in selling prices growth in the fourth quarter.

Looking ahead to FY 2025-26, the RBI anticipates Q1 inflation to be at 4.6% and Q2 at 4%. 

In recent months, inflation has risen significantly due to unexpected spikes in food prices. Despite core inflation remaining subdued, there was a slight increase in October, as stated by Das on Friday, December 6, 2024.

Das highlighted that although there has been some moderation, persistent food price pressures are likely to keep overall inflation elevated in the third quarter (October to December). He also pointed out that recent inflation and economic indicators in India have worsened compared to the last Monetary Policy Review.

The RBI's forecast for inflation in FY26 suggests a steady decrease, with estimates of 4.6% in Q1 and 4% in Q2, indicating a potential easing of inflationary pressures in the medium term. Nevertheless, short-term inflation remains worrisome, attributed to global and domestic factors affecting food supply and demand.

Retail inflation increased to 6.2% in October, marking the sharpest rise in over a year primarily due to fluctuating food prices. Food inflation surged to a 15-month high of 10.9%, surpassing the RBI's target of 4% and its tolerance band of 2-6%.

Recent data from CRISIL revealed that the cost of home-cooked vegetarian and non-vegetarian meals rose by 7.2% and 1.8% respectively compared to the previous year.

Food and retail inflation

RBI Governor Shaktikanta Das stated that food inflation is anticipated to remain high in the third quarter of FY25 before showing signs of easing in the fourth quarter. He emphasized that high inflation diminishes consumers' disposable income and highlighted potential risks from weather events, financial instability, and geopolitical issues.

Concerns have been raised by economists about the increasing disparity between slowing economic growth and persistent inflation.

Indranil Pan, Chief Economist at YES BANK, said: "This monetary policy contains many important perspectives for the future. First, there is acknowledgement that growth is slowing while inflation risks need a continuous watch. The backdrop to the policy was a sharp slowdown of growth to 5.4% for Q2 while inflation remained on the higher side and above the tolerance band. Having said, the RBI points to the fact that growth has likely bottomed in Q2 and is expected to rise in the remaining part of the year. On the other hand, inflation estimates for the current year has been moved up by 30 bps, with a sharp jolt seen in the estimates for Q3 inflation that has now been raised to 5.7% from the earlier 4.8%. The RBI assesses that inflation too will moderate to target going forward, but still wants to remain watchful of the evolving trends. Thus, the message appears clear, the RBI will not move the repo rate lower till there is absolutely confidence in inflation moderating to target. Given that we are at the inflection point for both growth and inflation, February remains live. The critical factor to watch out is the Trump policies after he comes into office and its impact on inflation and currency."

Raoul Kapoor, Co-CEO, Andromeda Sales and Distribution Pvt Ltd, said: "The central bank has kept the repo rate unchanged for the 11th consecutive time since February 2023. However, the good news is the reduction of the Cash Reserve Ratio (CRR) from 4.5% to 4%, reflecting the RBI’s careful approach to balancing mixed economic signals. While inflation remains above the comfort zone, the RBI continues to prioritize price stability alongside economic growth."

Radhika Rao, economist at DBS Bank, said, “This growth-inflation divergence will put the RBI MPC in a bind.” She projected a downward revision of the RBI’s full-year growth forecast by 30-40 basis points and an upward adjustment to its inflation projection.

Ashwani Dhanawat, Executive Director and Chief Investment Officer, Shriram General Insurance Company, said: "With inflation projections for FY25 revised to 4.8%, the committee's neutral stance reflects a cautious approach in balancing persistent inflationary pressures with the need to foster sustainable growth. While challenges on the consumption and investment fronts remain, the policy adjustments underscore the RBI’s focus on maintaining economic stability while ensuring adequate liquidity in the system."