The Reserve Bank of India (RBI) has forecasted consumer price inflation (CPI) to average 4.5% in 2024-25 in its latest monetary policy on October 9. Inflation is expected to stand at 4.1% in Q2, rise to 4.8% in Q3, and ease to 4.2% in Q4. The RBI notes that risks to inflation are evenly balanced. Confidence intervals for headline inflation in Q4: 2024-25 are projected between 3.2-5.2% (50% confidence) and 2.6-5.8% (70% confidence).
Looking ahead to 2025-26, the central bank’s estimates show inflation averaging 4.1%, assuming a normal monsoon and no major external or policy shocks. Inflation projections for 2025-26 include 4.3% in Q1, 3.7% in Q2, 4.2% in Q3, and 4.1% in Q4.Also Read: RBI Monetary Policy: Rate unchanged at 6.5%, change of stance to neutral
Core inflation, excluding food, fuel, and other volatile components, is expected to rise from 3.5% in Q2 to 3.9% in Q3 and stabilize between 4.2% and 4.3% in the subsequent quarters.
“Looking ahead, evolving food inflation dynamics will impinge upon the outlook for inflation. The above normal south-west monsoon rainfall, significantly higher reservoir levels as compared to decadal average and higher kharif sowing vis-a-vis last year bode well for the inflation outlook. Nevertheless, rising global supply chain pressures, adverse weather events, volatile food prices and continuing geopolitical strife remain key risks,” the RBI policy said.
Risks to projections
The RBI highlighted both upside and downside risks to its projections. Upside risks stem from uneven rainfall, ongoing geopolitical tensions, rising food and metal prices, crude oil volatility, and adverse weather conditions. Downside risks could emerge from an early resolution to geopolitical conflicts, reduced global demand, easing of food and commodity prices, improved supply conditions, and proactive government measures.
In the first half of 2024-25 (up to August), headline inflation stayed within the Reserve Bank of India’s (RBI) tolerance band, though food inflation remained elevated and persistent. According to the RBI’s September 2024 survey, urban households’ median inflation expectations for the next three months and one year ahead declined by 20 and 10 basis points, respectively, to 9.2% and 10.0%. Fewer respondents expected prices to rise faster than the current rate compared to the previous survey.
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Manufacturing firms surveyed during July-September 2024 expect cost pressures from raw materials to persist, albeit with some softening. However, the momentum in selling price growth is projected to continue in Q3:2024-25. In contrast, services and infrastructure firms anticipate input cost pressures will persist, though selling price growth may moderate.
In September 2024, Purchasing Managers’ Ind ex (PMI) surveys showed that input prices for both manufacturing and services firms increased compared to the previous month, while output prices declined. Professional forecasters surveyed by the RBI expect headline CPI inflation to rise from 4.0% in Q2:2024-25 to 4.6% in Q3, before easing to 4.4% in Q4. For the first half of 2025-26, inflation is forecasted to remain between 4.2% and 4.5%. Core inflation, excluding food, fuel, and other volatile components, is expected to rise from 3.5% in Q2 to 3.9% in Q3 and stabilize between 4.2% and 4.3% in the subsequent quarters.
