Food price volatility remains a contingent risk, cautioned Reserve Bank of India (RBI) staffers even as the central bank’s in-house model has projected FY25 retail inflation a tad higher at 4.6 per cent against 4.5 per cent estimated in the monetary policy committee’s bi-monthly statement.

“The prospects of headline inflation averaging 4.5 per cent in the second half of 2024-25, as set out in the August 2024 resolution of the monetary policy committee, have improved. Nonetheless, in light of the recent experience, food price volatility remains a contingent risk,” the central bank officials said in an article ‘State of the Economy’ in the latest monthly bulletin.

The staffers noted that headline consumer price index (CPI) inflation came in below the Reserve Bank’s 4 per cent target for the second consecutive month in its August reading (3.7 per cent against 3.6 per cent in July). They emphasised that this is a positive development, especially as the index has remained flat between July and August.

“Some vegetable price shocks have begun to reverse and if this continues and broadens, the persistence that characterised food inflation developments in the first quarter of 2024-25 may be behind us. An unfavourable base effect may haunt the September number.

“The outlook for international crude prices has turned benign and may be sustained, given developments relating to OPEC plus alluded to earlier and weak demand,” they said.

RBI’s in-house dynamic stochastic general equilibrium (DSGE) model has projected FY25 GDP growth slightly higher at 7.3 per cent (y-o-y) against 7.2 per cent estimated in the monetary policy committee’s bi-monthly statement. During 2025-26, GDP is projected to grow at 6.7 per cent, with headline CPI inflation softening to 3.9 per cent.

Slowing GDP

The staffers said more needs to be read into the slowing of India’s GDP in Q1:2024-25 to 6.7 per cent (in relation to 8.2 per cent in the year ago period) than just disappointment.

“Domestic drivers – private consumption and gross fixed investment – were robust and net exports remained sequentially positive in their support to GDP. The seasonally adjusted momentum of Q1 GDP was strong. Gross value added (GVA) growth actually rose sequentially in Q1, but the increase in subsidies – 3.6 per cent by the Union government and 26 per cent by the States – offset the gains from showing up in GDP growth,” per their assessment.

The RBI officials observed that household consumption is poised to grow faster in Q2 as headline inflation eases, with a revival of rural demand already taking hold.

“The demand for fast moving consumer goods (FMCG) is also accelerating as companies target older customers with healthy lifestyle products in response to rising longevity and affluence and younger ones with premiumisation

“Yet another consumption booster is the ramping up of hiring by e-commerce majors ahead of the festival season, not just in the metros but in tier-2 and -3 cities as well,” they said.

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